fHE    BUSINESS    OF 

LIFE  INSURANCE 


MILES 'M -DAWSON 


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BUSINESS  OF  LIFE  INSUEANCE 


THE  BUSINESS  of 
LIFE   INSURANCE 


BY 
MILES    MENANDER    DAWSON 

CONSULTING   ACTUARY 

Actuary  of  the  New  York  Legislative  Committee  for  the  Investigation 

of  Life  Insurance;  Fellow  of  the  Institute  of  Actuaries;  Member 

of  the  Actuarial  Society  of  America;  Author  of  "  Elements 

of  Life  Insurance,"  "  Practical  Lessons  in  Actuarial 

Science,**  etc. 


NEW  YORK  AND  CHICAGO 
THE  A.  S.  BARNES  COMPANY 


Graduate  S 

T 


Q  ' 


-: c.   Ad "A-X'.  i  3 tration 
Lus     :-K.)lf^s  24.   California 


OOPTKIQHT,  1905,  BT 

A.  S,  BARNES  &  COMPANY 

Published  September,  1905 

Second  Printing  November,  1906 

Third  Printing  October,  1906 


Bus.  AtdiBJ^ 

Library 


CONTENTS 


CHAPTEB  PAGE 

Introduction vil 

I.     Fundamental  Natuke  of  Life  Insurance 1 

II.    The  Simple  Mathematics  of  Life  Insurance.  8 

III.  Assessment  Life  Insurance 22 

IV.  Level  Premium  Companies 31 

v.    Reserves,  Nature  of  and  Necessity  for 38 

VI.  The  Partition  OF  THE  Premium 45 

VII.  Kinds  of  Life  Insurance  Policies  ."r* (&3) 

VIII.  Surplus,   Whence  Derived  and  How  Ascer- 
tained       61 

IX.  Surplus,  How  Apportioned  and  Applied 68 

X.  Policy  Conditions ^Jj) 

XI.  Beneficiaries — Insurable  Interest 92 

XII.  Convertibility   98 

XIII.  Individual  Accounts 104 

XIV.  Stock  and  Mutual  Life  Insurance  Companies  113 

XV.  Mutual  Companies  with  Guaranty  Capital 

and  Mixed  Companies 130 

XVI.  An  Analysis  of  Agency  Systems 147  * 

XVII.  Provision  fob  Expenses — ^Anomalies  in  Load- 

ing    159 

XVIII.  When  Is  New  Business  Profitable? 163' 

XIX.    Legal  Reserve  Requirements  and  Their  Ef- 
fect    175 

XX,    The  Evolxttion  of  Varieties  of  Life  Insur- 
ance Policies 193 

XXI.    Rebating,  Local  Boards  and  Stock  with  Poli- 
cies     206 

XXII.    "Dating    Back"    Schemes    and    Investment 

Bonds  218 

XXIII.    Life  Insurance  as  an  Investment 226 

T 


VI 


CONTENTS 


CHAPTER  PAStE 

XXIV.    The  Ideal  Policy (^V 

XXV.    Impaired,    Sub-standard,    or  Under- average 

Lives   248 

XXVI.     From  Application  to  Payment  of  Claim.  . . .  261 

XXVII.     Investment  of  Funds 273 

XXVIII.    Lessons  from  The  Cri^dit  Mobilier  and  The 

Credit  Foncier 287 

XXIX.    Reorganisation  OF  Assessment  Societies.  ..  300 
XXX.     The  Readjustment  of  Rates  in  Fraternal 

Insurance  Orders 317 

XXXI.    State  and  National  Supervision 334 

XXXII.     The  Annual  Statement 350 

XXXIII.  The  Gain  and  Loss  Exhibit 372 

XXXIV.  Hints  and  Helps  in  Purchasing  Life  Insur- 

ance      388 

XXXV.    Remedies 400 


INTRODUCTION 

Many  books  concerning  life  insurance  have 
been  published  heretofore  for  the  instruction  of 
persons  who  are  engaged  in  the  life  insurance 
business  in  one  capacity  or  another.  They  will 
in  some  cases  be  found  useful  also  to  persons 
who  merely  patronise  life  insurance ;  and,  when 
this  is  true,  will  amply  repay  study. 

This  book  is  published,  however,  for  the  spe- 
cial uses  of  the  great  public,  composed  of  per- 
sons, nearly  all  of  whom  purchase  insurance  on 
their  lives.  Many  of  these  also  earn  their  live- 
lihood by  selling  it,  some  by  employment  in  the 
service  of  companies  that  provide  it,  and  a  very 
few  in  managing  these  companies.  It  is  hoped 
and  anticipated  that  just  because  this  book  has 
been  prepared  for  the  instruction  of  all  who  buy 
and  hold  life  insurance  policies,  it  will  be  of 
unusual  interest  and  perhaps  of  uncommon 
utility  to  the  agents  of  life  insurance  companies, 
their  employees  and  their  officers;  but  that  is 
not  the  chief  purpose. 

In  this  volume  it  is  intended  to  speak  plainly 
and  fairly  on  all  subjects,  on  the  ground  that 


viii  INTRODUCTION 

such  is  due  the  readers,  and  that  the  beneficent 
institution  of  life  insurance  is  good  enough  to 
have  the  truth  told  about  it. 

An  earnest  effort  is  made  to  do  full  justice 
to  the  merits  of  life  insurance  and  of  the  liberal 
benefits  of  the  modern  life  insurance  policy; 
and,  on  the  other  hand,  the  evils  and  defects 
are  dealt  with  unsparingly. 

This  is  a  book  of  opinions,  of  the  deliberate 
judgments  which  have  been  framed  as  a  result 
of  a  quarter  century's  close  and  assiduous 
study  and  observation.  It  does  not  purport  to 
be  a  mere  narrative  of  facts  without  conclu- 
sions; instead  it  records  the  author's  best- 
considered,  thoroughly-formed  and  firmly-held 
convictions,  set  down  without  a  desire  to  injure 
anybody,  but  with  the  purpose  of  serving  all 
who  read  this  book. 

New  York,  June  28, 1905.  M.  M.  D. 


CHAPTER    I 

FUNDAMENTAL   NATURE  OF  LIFE  INSUEANCE 

Insurance  is  indemnity.  The  earliest  type 
of  this  is  the  bond  of  indemnity.  A  surety  was 
the  first  insurer  and  the  principal  in  the  bond 
the  first  insured.  Notwithstanding  which,  the 
giving  of  bonds  by  a  corporation  for  the  con- 
sideration of  a  premium  is  one  of  the  most  re- 
cently introduced  forms  of  insurance. 

It  follows,  therefore,  that  the  issue  of  a  policy 
promising  to  pay  money  upon  the  happening 
of  a  named  event,  which  is  contingent  only  and 
may  or  may  not  happen,  is  or  is  not  insurance, 
according  as  the  beneficiary  of  the  policy  would 
or  would  not  be  a  loser  by  the  event  in  an 
amount  not  less  than  the  sum  insured.  Insur- 
ance can  only  indemnify  against  loss ;  more  than 
this  is  gambling. 

This  may  be  put  another  way  which  will  per- 
haps make  the  distinction  between  speculative 
or  gambling  policies  and  insurance  yet  plainer. 
We  are,  in  the  nature  of  things,  subject  to  perils, 
arising  out  of  the  conditions  of  human  life. 

1 


2      BUSINESS  OF  LIFE  INSURANCE 

Thus  the  owner  of  a  house  by  the  mere  fact  of 
his  ownership  becomes  subject  to  the  danger  of 
loss  or  damage  of  his  property  by  fire,  light- 
ning, explosion  or  collapse.  He  has  no  choice 
but  take  these  chances  if  he  continues  the  owner. 
To  that  extent  the  nature  of  things  makes  of 
him  a  speculator.  In  the  same  manner  the  mere 
fact  of  marriage  compels  the  wife  to  take  these 
chances  as  to  the  survival  of  her  husband  to 
perform  the  duties  of  a  husband  toward  her  and 
of  a  \  father  toward  her  children,  the  mere  fact 
of  birth  necessitates  that  the  children  take  their 
chances  likewise  as  to  the  survival  of  both  par- 
ents to  support  and  educate  them,  and  the  mere 
fact  of  the  being  alive  of  an  individual  subjects 
him  to  the  perils  of  disablement  by  sickness  or 
accident.  From  all  of  this  there  is  no  escape. 
Nature  makes  all  of  us  speculators,  of  neces- 
sity, whether  we  will  or  not. 

Though  the  unvarying  laws  of  nature  will  not 
permit  one  to  escape  the  risks  which  they  im- 
pose upon  him,  he  may  render  those  perils  nuga- 
tory wholly  or  in  part  by  combining  with  others 
who  at  the  outset  appear  to  be  subject  to  like 
risks,  and  by  engaging  in  advance  that  each 
shall  bear  his  proportion  of  the  loss  which  ac- 
tually falls  upon  some  of  their  number.  This 
is  insurance  in  its  most  simple  and  obvious 
form.  It  is  typical,  likewise,  and  signifies  that 
at  the  bottom  al]  insurance  is  mutual.     The 


NATURE   OF   LIFE   INSURANCE      3 

losses  are  expected  to  be  met,  not  from  the  capi- 
tal, but  from  the  premiums. 

In  insurance,  therefore,  persons  who,  so  far 
as  they  can  themselves  see  or  so  far  as  the  man- 
agers can  discriminate,  are  equally  liable  to  a 
given  peril,  contribute  equally  in  proportion  to 
the  indemnity  desired  by  each,  small  sums  to 
a  common  fund  from  which  those  of  their  num- 
ber who  actually  suffer  loss  in  the  given  manner 
are  indemnified. 

For  the  individual,  it  is  therefore  a  hedge,  a 
counter  wager,  to  cancel  or  offset  the  risks 
which  nature  compels  him  to  take.  It  is  the  di- 
rect opposite  of  gambling,  then,  so  far  as  the 
insured  is  concerned. 

At  first  blush  it  may  seem  that  it  must  be 
gambling  for  the  company  which  for  a  premium 
assumes  the  risk  for  a  consideration.  This 
view,  however,  flows  out  of  a  wrong  conception 
of  the  function  of  the  company  in  the  matter, 
which  is  really,  in  this  regard,  merely  that  of 
custodian  of  the  premium  fund.  It  will  at  once 
be  seen  that  if  the  insured  were  to  arrange  for 
indemnity  by  means  of  a  mutual  fund,  there 
would  be  no  gambling  about  it  at  any  point,  by 
which  it  is  not  meant  to  say  that  the  success  of 
the  scheme  would  be  assured  or  that  bad  busi- 
ness management  would  not  be  able  to  defeat 
the  purpose.  But  if  the  total  losses  that  would 
take  place  among  the  insured  were  certainly 


4      BUSINESS  OF  LIFE  INSURANCE 

known  in  advance  and  paid  for  then,  or  if  not 
certainly  known  were  made  good  after  the  event 
by  assessments  as  agreed  upon,  payment  being 
secured,  it  is  clear  that  the  individuals  would 
be  relieved  of  their  risks  and  that  no  risk  would 
be  incurred  by  the  company.  In  other  words, 
the  element  of  hazard  would  be  entirely  can- 
celled, except  that  in  the  latter  case  there 
might  be  variation  in  the  price  of  the  insur- 
ance. 

When  the  insurance  is  furnished  by  a  company 
with  capital  or  surplus  which  answers  as  a  given 
guaranty  of  stability,  it  becomes  a  business,  in- 
stead of  a  speculation,  the  distinction  being  that 
while  an  individual  who  assumes  a  single  risk 
either  loses  or  gains  thereby  the  whole  amount 
involved,  the  company  which  takes  many,  by 
means  of  the  aggregate  business  reduces  the 
possible  variations  to  narrow  limits  and  really 
makes  of  insurance  a  business  attended  with 
less  peril  than  almost  any  other. 

Thus  as  to  life  insurance.  During  a  given 
year,  an  individual  either  dies  or  he  survives  the 
year ;  the  result  is  a  hundred  per  cent  loss  or  a 
hundred  per  cent  gain,  if  one  wagers  upon  the 
one  life.  But  make  100,000  of  these  bets  upon 
persons  of  the  same  age  and  like  physical  con- 
dition and  the  variation  in  the  result  will  not 
be  two  per  cent  usually,  instead  of  two  hundred 
per  cent. 


NATURE   OF   LIFE   INSURANCE      5 

There  is  nothing  more  uncertain  than  life  and^ll 
nothing  more  certain  than  life  insurance.         ^ 

The  risk  of  death  differs  in  important  par- 
ticulars from  all  other  perils  to  which  we  are 
exposed  or  which  are  made  the  subject  of  in- 
surance. The  chief  difference  is  that  while 
other  risks  are  hazards  only,  death  is  ultimately 
a  certainty.  At  all  times,  therefore,  it  is  a  haz- 
ard, converging  into  a  certainty.  This  does  not 
mean  that  it  is  necessarily  an  increasing  hazard 
at  all  ages,  though  it  is  at  most  ages;  in  the 
first  year  after  birth,  for  instance,  the  mor- 
tality is  heavier  than  in  the  second,  and  indeed 
the  risk  of  death  during  the  year  diminishes 
each  year  throughout  the  period  of  early  in- 
fancy. But  whether  taken  from  birth  or  from 
a  later  period  when  the  liability  to  die  becomes 
a  rapidly  increasing  function,  death  is  certain 
in  the  end.  It  follows,  therefore,  tha,t  insur- 
ance against  death  at  whatever  time  it  may  take 
place,  involves  not  merely  providing  against  the 
hazard  of  death  each  year,  but  also  provision 
to  meet  at  the  ultimate  limit  of  human  life  an 
absolutely  certain  claim  if  one  has  up  to  that 
time  been  escaped. 

Insurance  differs  from  gambling  also  in  yet 
another  particular.  The  company  appears  not 
merely  in  the  role  of  putting  at  stake  the 
amount  of  its  policy,  but  also  as  stakeholder, 
t.  e,^  as  holder  of  the  stakes  put.  up  by  the  in- 


6      BUSINESS  OF  LIFE  INSUBANCE 

Bured,  itself  putting  up  no  stakes,  but  merely 
making  good  its  losses  out  of  the  forfeited 
stakes  of  those  of  the  insured  who  have  not  suf- 
fered loss  and  so  cannot  make  claim,  and  out 
of  its  other  funds  if  necessary.  But  in  event 
of  loss,  it  does  not  pay  its  obligation  and  also 
return  the  policyholder's  stake,  the  premium 
which  he  has  paid.  Life  insurance  policies 
are,  however,  sometimes  issued  which  do  prom- 
ise the  return  of  the  premiums  paid  if  death 
occurs  within  a  certain  period,  or  even,  much 
more  rarely,  whenever  death  may  occur.  In 
the  former  case,  in  addition  to  a  larger  pre- 
mium, other  conditions,  such  as  proportionate 
returns  in  surrender  value,  are  always  less  fa- 
vorable; and  in  the  latter  case  the  premium  is 
made  much  higher,  so  that  additional  interest 
accumulations  offset  this. 

It  is  this  feature,  however,  that  the  company 
is  stakeholder,  and  not  under  obligations  to  re- 
turn the  stake  of  the  policyholder  (i.  e.,  retains 
in  any  event  all  premiums  or  all  interest  upon 
the  funds  or  both),  which  makes  insurance  for 
the  whole  period  of  life,  and  especially  by  single 
premiums,  possible,  in  spite  of  the  fact  that  the 
death  of  the  insured  is  certain  in  the  end. 

This  may  be  more  clearly  seen  if  it  is  con- 
sidered how  certain  to  incur  a  total  loss  of  his 
stake  a  man  would  be  who  would  put  up  one 
thousand  dollars  against  any  stake  you  please, 


NATURE   OF   LIFE  INSURANCE     7 

in  the  hands  of  responsible  third  parties,  the 
stakes  of  both  parties,  with  all  interest  earned 
npon  the  same,  to  be  given  to  the  winner  of  a 
bet  that  a  given  person  will  not  die.  He  would 
have  lost  his  money  as  soon  as  he  made  the  bet, 
and  the  only  uncertainty  would  be  as  to  when 
the  stakeholder  would  turn  the  stakes  over  to 
his  adversary. 

It  was  failure  to  see  the  necessity  for  provid- 
ing for  an  increasing  hazard,  converging  into 
certainty,  which  has  caused  many  serious  errors 
in  the  fundamental  plans  of  some  institutions 
formed  to  furnish  life  insurance,  and  the  thing 
which  separates  plans  of  insurance  into  sound 
and  unsound  is  precisely  whether  intelligent  re- 
gard for  this  principle  has  guided  the  company 
in  determining  its  rates  of  premium  and  the 
management  and  disposition  of  its  funds. 


CHAPTER    n 

THE    SIMPLE     MATHEMATICS    OF    LIFE    INSURANCE 

The  mathematics  of  life  insurance  is,  when 
the  term  is  used  in  a  comprehensive  sense,  so 
considerable  and  so  technical  that  to  be  able  to 
apply  it  properly  is  the  most  essential  qualifica- 
tion for  what  has  become  a  distinct  profession. 
The  calculations  of  actuaries,  on  the  whole,  also 
are  of  a  nature  not  readily  comprehensible  by 
persons  who  are  not  skilled  both  in  mathematics 
and  in  insurance  principles  and  practices.  In 
the  profession  some  of  the  higher  developments 
of  the  science  of  mathematics  are  applied  at 
times  which  renders  the  processes  more  puz- 
zling to  the  man  in  the  street. 

Very  nearly  all  of  this,  however,  is  due  to  the 
desire  to  use  * '  short  cuts ' '  or  quicker  processes 
to  arrive  at  the  desired  result.  In  other  words, 
these  formidable-looking  rules  and  formulas  are 
merely  labour-saving  devices,  like  the  calculat- 
ing machines  which  are  often  found  in  actu- 
aries' offices.  The  principles  by  means  of  which 
the  ordinary  calculations  by  actuaries  are  made 


LIFE  INSURANCE  MATHEMATICS     9 

are  very  simple,  and  may  be  explained  in  a  few 
words. 

The  calculations  are  based  upon  a  mortality 
table.  This  table  shows  how  a  certain  large  num- 
ber of  persons,  as  100,000  or  1,000,000,  setting 
forth  from  a  given  age,  is  diminished  year  by 
year  by  death.  They  are  based  upon  actual  ex- 
perience, and  when  used  for  life  insurance  com- 
putations, upon  actual  experience  among  in- 
sured lives. 

Of  course,  no  company  does  have  just  100,000 
men  set  forth,  for  instance,  from  age  21  at  the 
same  time,  and  continue  under  observation  until 
all  have  died.  Nor  do  all  come  imder  obser- 
vation, even,  at  a  given  age  at  all,  nor  all  remain 
under  observation  until  they  die.  What  the 
companies  have  is  the  record  of  the  actual  ex- 
posures at  each  attained  age,  out  of  the  lives 
insured  by  them,  while  under  observation.  That 
is  to  say,  they  can  tell  how  many  persons  have 
passed  through  a  certain  year  of  age  while  in- 
sured by  them,  and  how  many  of  these  have 
died.  By  dividing  the  number  of  the  latter  for 
each  age  by  the  number  of  the  former,  they  can 
ascertain  what  percentage  of  those  who  passed 
through  that  year  of  age  have  in  fact  died.  This 
is  called  the  death-rate  at  that  age. 

As  much  the  larger  number  of  "exposures" 
in  a  general  insurance  experience  at  any  given 
age  at  which  new  lives  are  accepted  for  insur- 


10    BUSINESS  OF  LIFE  INSURANCE 

ance,  and  especially  at  the  younger  ages,  would 
be  likely  to  be  persons  who  were  not  immedi- 
ately subject  to  a  normal  risk  of  death,  because 
freshly  selected  by  medical  examination,  Ameri- 
can actuaries  hold  that  such  a  mortality  table  is 
not  suitable  for  use  in  computing  rates  of  pre- 
mium. For  this  purpose  a  table,  in  order  to  be 
safe,  should  not  show  a  lower  mortality  than  is 
to  be  expected  on  lives,  for  instance,  which  are 
at  least  five  years  past  the  time  of  examination. 
Such  a  table  is  called  an  ultimate  table,  meaning 
that  it  represents  the  mortality  fairly  to  be  ex- 
pected in  a  well-conducted  company  upon  lives 
which  have  reached  their  ultimate  death-rate 
for  the  various  attained  ages.  Such  a  table  the 
American  Experience  Table  is  considered  to  be ; 
and,  although  not  constructed  in  this  manner, 
the  Actuaries'  Table  fairly  fulfills  this  condi- 
tion. 

By  means  of  these  death-rates  the  actuary  can 
compute  the  rate  of  premium  necessary  to  cover 
the  risk  of  death  for  a  single  year.  At  first 
sight  it  would  appear  that  this  would  also  be 
the  increasing  annual  premium  which  the  com- 
pany would  need  to  charge  j^-ear  after  year  to 
furnish  continuous  insurance  at  its  current  cost 
so  long  as  is  required.  Theoretically,  this  is 
true,  and  practically  it  might  stand  also  for 
many  years.  But  it  would  not  do  permanently, 
because  when  the  insured  lives  become  old  the 


LIFE  INSURANCE  MATHEMATICS   11 

premiums  would  rapidly  increase,  and  the  need 
for  the  protection  would  rapidly  decrease.  In 
consequence,  persons  at  these  ages  who  did  not 
think  that  the  life  insurance  at  the  price  was  a 
good  speculation  for  their  estates,  in  other 
words,  the  hale  and  vigorous,  would  drop  out, 
leaving  only  lives  which  are  not  up  to  the  aver- 
age and  are  likely  soon  to  fail. 

The  mortality  table  was  based  upon  the  aver- 
age at  these  ages,  as  well  as  all  others,  which 
means  upon  a  certain  proportion  of  the  lives 
being  still  healthy,  as  is  always  the  case  in  a 
well-conducted  company  operating  on  the  level 
premium  plan.  But  when  this  condition  no 
longer  obtains,  this  mortality  table  does  not 
represent  the  deaths  to  be  expected,  and  there- 
fore rates  based  upon  it  would  not  be  sufficient. 

No  company  has  ever  yet  been  able  to  apply 
this  method  of  increasing  premiums  to  cover 
the  increasing  hazards  at  the  higher  ages,  and 
therefore  no  mortality  experience  suitable  for 
such  purpose  is  available.  It  would  probably 
fix  the  ultimate  limit  of  life  at  a  very  low  age, 
comparatively,  such  as  75,  instead  of  96  or  100, 
because  only  lives  which  are  practically  certain 
to  fail  soon  would  continue  the  insurance  be- 
yond age  70  or  thereabouts,  when  confronted 
with  constantly  and  very  rapidly  increasing 
premiums. 

Insurance  on  the  increasing  insurance  plan 


12    BUSINESS  OF  LIFE  INSURANCE 

is  feasible,  though  usually  not  desirable,  when 
it  is  applied  only  at  the  ages  of  youth  and  of 
middle  life,  but  a  change  must  be  made  to  level 
premiums  before  old  age  comes  on;  for,  with 
the  rapid  convergence  of  the  mere  risk  into  a 
certainty  of  death,  no  other  form  of  insurance 
is  practicable,  except  level  premium  insurance. 

Yet  all  forms  of  level  premium,  whole  life 
insurance,  whether  with  premiums  for  life  or 
for  a  term  of  years  only,  are  precisely  the 
mathematical  equivalents  of  increasing  pre- 
miums, and,  if  all  men  were  clear-headed  and 
fully  informed,  so  that  a  man  would  carry  his 
insurance  so  long  as  he  wants  it  and  no  longer, 
and  if  at  the  higher  ages  men  would  not  drop  it 
rather  than  pay  its  average  cost,  when  they  con- 
sider their  chances  better  than  the  average,  it 
would  be  just  as  economical  for  a  man  to  carry 
his  insurance  on  the  increasing  premium  plan, 
taking  into  account  his  payments  and  his  indem- 
nity, as  upon  any  other  plan. 

To  arrive  at  the  method  of  computing  a  level 
premium,  let  us  first  consider  how  we  would  go 
to  work  to  calculate  the  single  premium.  Let 
us  assume  the  following  mortality  table  to  rep- 
resent the  experience  to  be  expected: 


LIFE  INSUliANCE  MATHEMATICS   13 


AMERICAN  EXPERIENCE  TABLE  OF  MORTALITY. 


Number 

Age.  living. 

10 100,000 

11 99,251 

12 98,505 

13 97,762 

14......  97,022 

15 96,285 

16 95,550 

17 94,818 

18 94,089 

19 93,362 

20 92,637 

21 91,914 

22 91,192 

23 90,471 

24 89,751 

25 89,032 

26 88,314 

27 87,596 

28 86,878 

29 86,160 

30 85,441 

31......  84,721 

32 84,000 

33 83,277 

34 82,551 


Number 
dying. 

749 

Yearly 
proba- 
bility of 
dying. 

.007490 

Yearly 
proba- 
bility of 
surviving. 

.992510 

746 

.007516 

.992484 

743 

.007543 

.992457 

740 

.007569 

.992421 

737 

.007596 

.992404 

735 

.007634 

.992366 

732 

.007661 

.992339 

729 

.007688 

.992312 

727 

.007727 

.992273 

725 

.007765 

.992235 

723 

.007805 

.992195 

722 

.007855 

.992145 

721 

.007906 

.992094 

720 

.007958 

.992042 

719 

.008011 

.991989 

718 

.008065 

.991935 

718 

.008130 

.991870 

718 

.008197 

.991803 

718 

.008264 

.991736 

719 

.008345 

.991655 

720 

.008427 

.991573 

721 

.008510 

.991490 

723 

.008607 

.991393 

726 

.008718 

.991282 

729 

.008831 

.991169 

14    BUSINESS  OF  LIFE  INSURANCE 


Number 

As*.  living. 

35 81,822 

36 81,090 

37 80,353 

38 79,611 

39 78,862 

40 78,106 

41......  77,341 

42 76,567 

43 75,782 

44 74,985 

45 74,173 

46 73,345 

47 72,497 

48 71,627 

49 70,731 

50 69,804 

51 68,842 

52 67,841 

53 66,797 

54 65,706 

55 64,563 

56 63,364 

57 62,104 

58 60,779 

59 59,385 

60. ; . . . .  57,917 

61 56,371 

62 54,743 


Number 
dying. 

732 

Yearly 

proba- 
bility of 
dying. 

.008946 

Yearly 
proba- 
bility of 
surviylng. 

.991054 

737 

.009089 

.990911 

742 

.009234 

.990705 

749 

.009408 

.990592 

756 

.009586 

.990414 

765 

.009794 

.990205 

774 

.010008 

.989992 

785 

.010252 

.989748 

797 

.010517 

.989483 

812 

.010829 

.989171 

828 

.011163 

.988837 

848 

.011562 

.988438 

870 

.012000 

.988000 

896 

.012509 

.987491 

927 

.013106 

.986894 

962 

.013781 

.986219 

1,001 

.014541 

.985459 

1,044 

.015389 

.984611 

1,091 

.016333 

.983667 

1,143 

.017396 

.982604 

1,199 

.018571 

.981429 

1,260 

.019885 

.980118 

1,325 

.021335 

.978665 

1,394 

.022936 

.977064 

1,468 

.024720 

.975280 

1,746 

.026693 

.973307 

1,628 

.028880 

.971120 

1,713 

.031292 

.968708 

LIFE  INSURANCE  MATHEMATICS   15 


Number 

Age.  living. 

63 53,030 

64 51,230 

65 49,341 

66 47,361 

67 45,291 

68 43,133 

69 40,890 

70 38,569 

71 36,178 

72 33,730 

73 31,243 

74 28,738 

75 26,237 

76 23,761 

77 21,330 

78 18,961 

79 16,670 

80 14,474 

81 12,383 

82 10,419 

83 8,603 

84 6,955 

85 5,485 

86 4,193 

87 3,079 

88 2,146 

89 1,402 

90 847 


Number 
dying. 

1,800 

Yearly 
proba- 
bility of 
dying. 

.033943 

Yearly 
proba- 
bility of 
surviving. 

.966057 

1,889 

.036873 

.963127 

1,980 

.040129 

.959871 

2,070 

.043707 

.956293 

2,158 

.047647 

.952353 

2,243 

.052002 

.947998 

2,321 

.056762 

.943238 

2,391 

.061993 

.938007 

2,448 

.067665 

.932335 

2,487 

.073733 

.926267 

2,505 

.080178 

.919822 

2,501 

.087028 

.912972 

2,476 

.094371 

.905629 

2,431 

.102311 

.897689 

2,369 

.111064 

.888936 

2,291 

.120827 

.879173 

2,196 

.131734 

.868266 

2,091 

.144466 

.855534 

1,964 

.158605 

.841395 

1,816 

.174297 

.825703 

1,648 

.191561 

.808439 

1,470 

.211359 

.788641 

1,292 

.235552 

.764448 

1,114 

.265681 

.734319 

933 

.303020 

.696980 

744 

.346692 

.653308 

555 

.395863 

.604137 

385 

.454545 

.545455 

16    BUSINESS  OF  LIFE  INSURANCE 


lAge. 

91 

Number 
living. 

462 

Number 
dying. 

246 

Yearly 
proba- 
bility of 
dying. 

,532466 

Yearly 
proba- 
bility of 
surviving. 

.467534 

92 

216 

137 

.634259 

.365741 

93 

79 

58 

.734177 

.265823 

94 

21 

18 

.857143 

.142857 

95 

3 

3 

1.000000 

.000000 

Let  us  assume  that  the  funds  which  are  not 
immediately  required  to  pay  death  losses  will 
be  invested  to  earn  interest  at  3  per  cent  per 
annum.  Also  that  death  claims  are  payable  at 
the  end  of  the  year,  which  is  not  the  case,  of 
course,  but  it  is  assumed  usually  for  conveni- 
ence in  calculations. 

At  age  10,  according  to  this  table,  out  of  100,- 
000  living  at  the  beginning  of  the  year,  749  die 
during  the  year.  The  risk  of  having  to  pay  the 
claim  at  the  end  of  the  first  year,  therefore,  is 
.00749.  The  present  value  now  of  each  dollar 
to  be  paid  at  the  end  of  one  year  is  $.97087,  or 
of  $1,000,  $970.87.  The  present  value  of  the 
chance  of  paying  it  is  $970.87  multiplied  by 
.00749. 

Out  of  the  100,000  starting  from  age  10,  746 
are  expected  to  die  the  second  year,  i.  e.,  in  their 
eleventh  year  of  age.  The  chance  that  any  par- 
ticular one  of  the  100,000  will  be  among  them  is 
.00746;  the  present  value  of  the  $1,000  if  it  is 
paid  at  the  end  of  two  years  is  $942.60;  the 


LIFE  INSURANCE  MATHEMATICS   17 

present  value  of  the  chance  of  having  to  pay 
the  claim  then  is  $942.60  multiplied  by  .00746. 

Proceeding  in  this  manner,  we  find  that  the 
present  value  of  the  chance  of  paying  the  claim 
at  the  end  of  the  fiftieth  year  is  .02321  (since 
of  the  100,000  setting  out  at  age  10  2,321  die  in 
their  sixty-ninth  year  of  age)  multiplied  by 
$228.11,  the  present  value  of  $1,000  if  paid  at 
the  end  of  50  years.  Similarly,  .00001  multi- 
plied by  $78.70  is  the  present  value  of  the  chance 
that  a  claim  will  fall  due  85  years  from  now,  be- 
cause of  the  possible  survival  of  a  given  one  to 
the  age  of  95  and  his  death  in  that  year  of  age. 

Wlien  you  add  all  these  present  values  to- 
gether, you  have  the  present  value  of  all  the 
chances  that  $1,000  will  be  paid  on  account  of 
the  death  of  the  insured.  To  put  it  another 
way,  you  have  the  present  value  of  the  pre- 
miums on  an  increasing  scale  which  he  would 
need  to  pay  throughout  his  lifetime,  multiplied 
in  each  case  by  the  probability  that  he  will  sur- 
vive to  that  age  to  pay  the  premium.  The  result 
is  the  single  premium,  which  will  pay  for  his 
life  insurance  as  long  as  he  lives. 

In  pajdng  for  this  insurance  out  of  the  single 
premium  you  may  look  at  it  in  either  of  two 
ways,  namely : 

First :  That  each  year  so  much  of  the  interest 
upon  the  single  premium,  and  of  the  single  pre- 
mium itself,  if  necessary,  is  taken  as  is  required 


18    BUSINESS  OF  LIFE  INSURANCE 

to  cover  the  full,  annually  increasing  premium 
for  $1,000  insurance.  In  this  case,  however,  you 
must  on  the  other  hand  rebate  to  the  policy  so 
much  of  this  annually  increasing  premium  as 
would  pay  for  an  insurance  that  year  equal  to 
the  fund  on  hand,  and  when  the  insured  dies  the 
fund  itself  is  rebated  back  in  the  same  manner 
to  those  who  survive. 

Second:  That  the  ''actual  insurance,"  as  it 
is  called,  i.  e.,  the  amount  payable  above  what 
the  insured's  own  fund  will  cover,  is  all  that 
the  company  has  at  risk,  and  therefore  all  that 
need  be  charged  for  at  the  annually  increasing 
rate  of  premium. 

The  mortality  being  the  same,  that  is,  accord- 
ing to  the  table,  the  two  things  bring  the  insured 
out  with  the  same  net  fund  on  hand. 

To  compute  the  annual  premium  it  is  first 
necessary  to  find  out  what  on  the  average  one 
dollar,  payable  at  the  beginning  of  each  year, 
so  long  as  the  insured  lives,  will  be  worth.  Re- 
course is  therefore  had  again  to  the  mortality 
table,  as  follows: 

The  value  of  the  first  $1.00  is  100  cents,  be- 
cause it  is  paid  in  advance. 

If  the  dollar  at  the  end  of  the  first  year  were 
paid  without  reference  to  the  survival  of  the  in- 
sured, it  would  be  worth  $.97087.  But  it  is  only 
payable  by  the  99,251  men  out  of  100,000  who 
survive  the  year,  and  the  chance  that  this  youth, 


LIFE  INSUEANCE  MATHEMATICS  19 

starting  out  at  age  10,  will  be  one  of  them  is 
plainly  .99251.  The  present  value  of  the  chance 
that  this  dollar  will  be  paid  is,  therefore,  $.97087 
multiplied  by  .99251. 

Proceed  in  like  manner  for  each  successive 
age  and  add  together  the  results.  This  gives 
you  the  present  value  of  one  dollar  paid  at  the 
beginning  of  each  year  that  the  youth  will  en- 
ter upon.  You  also  have  in  the  single  premium 
the  present  value  of  all  he  needs  to  pay  to  carry 
life  insurance  for  $1,000  as  long  as  he  lives.  If 
you  divide  the  latter  by  the  former  you  have 
the  number  of  dollars  payable  at  the  beginning 
of  each  year  if  the  insured  is  living,  which  are 
equivalent  in  present  value  to  the  annually  in- 
creasing premiums  which  are  required  to  be  met 
in  order  to  carry  his  insurance  as  long  as  he 
lives.  In  other  words,  you  have  the  suflScient 
annual  premium. 

These  premiums  are  called  *'net."  because 
just  suflScient  to  meet  the  claims  if  mortality 
and  interest  prove  to  be  precisely  as  was  as- 
sumed. Though  the  foregoing  explanation  will 
not,  it  is  hoped,  be  found  diflScult  to  grasp,  it 
is  not  necessary  to  have  mastered  even  so  much 
in  order  to  be  in  possession  of  knowledge  of  the 
test  to  which  all  kinds  of  premiums  must  re- 
spond, in  order  that  they  may  be  known  to  be 
sufficient.    This  test  is : 

Assume,  for  instance,  that  100,000  youths  of 


20    BUSINESS  OF  LIFE  INSURANCE 

age  10  were  to  set  forth,  paying  the  annual  pre- 
mium alleged  to  be  correct  for  that  age.  As- 
sume that  interest  is  earned  precisely  as  ex- 
pected and  that  the  mortality  is  just  as  per  the 
American  Experience  Table.  The  premiums 
are  received  the  first  year  in  advance  from 
100,000  youths.  They  are  improved  at  interest 
for  one  year;  $749,000  in  death  claims,  because 
of  the  deaths  of  749  of  the  group,  must  be  paid 
at  the  end  of  the  year.  The  99,251  survivors 
pay  their  second  premiums.  The  fund  is  again 
improved  at  interest  for  one  year,  and  the  746 
deaths  which  take  place  that  year  are  paid  for. 
The  process  is  continued  until  the  survivors 
have  reached  95,  during  which  year  of  age  the 
last  of  them  pass  away.  If  the  premiums  have 
been  correctly  computed,  and  if  the  assumptions 
as  to  interest  and  mortality  have  been  exactly 
realised,  there  will  be  just  money  enough  on 
hand  at  the  end  of  the  year  of  age,  95,  to  pay 
the  last  claims  and  nothing  left. 

This  test  of  adequacy  applies  to  all  kinds  of 
premiums  and,  whether  the  actuary's  processes 
are  easy  to  understand  or  difficult,  they  are,  in 
computing  premiums,  directed  toward  bringing 
out  results  which  will  stand  this  test.  If  the 
premiums  asked  by  any  company  or  society  are 
not  such  that,  when  worked  out  in  connection 
with  a  large  group  and  precisely  on  the  assump- 
tions according  to  which  they  are  supposed  to 


LIFE  INSUHANCE  MATHEMATICS   21 

have  been  made,  tliey  accurately  fulfill  the  con- 
dition that  they  enable  the  company  to  meet  the 
claims,  without  surplus  or  deficiency,  they  are 
manifestly  incorrect.  Of  course,  however,  un- 
less premiums  and  all  calculations  are  carried 
out  to  very  small  fractions  this  test  will  not 
work  out  with  absolute  precision. 


CHAPTER    III 

ASSESSMENT   LIFE   INSURANCE 

The  description  which  has  been  given  of  the 
simple  mathematical  principles  of  life  insur- 
ance will  enable  us  to  consider  the  claims  of  a 
form  of  life  insurance  which  not  inaptly  might 
be  called  unbusinesslike  life  insurance.  It  is 
known  as  assessment  life  insurance.  At  one 
time,  not  very  long  ago,  institutions  which  fur- 
nished protection  on  this  plan  transacted  fully 
one-half  the  entire  life  insurance  of  the  United 
States;  but  of  late  the  decline  of  this  busi- 
ness has  been  marked.  The  errors  of  the  plan 
have  shown  themselves  in  actual  practice. 
Some  of  the  companies  have  reorganised  as 
regular  insurance  companies  on  the  level  pre- 
mium basis,  not  without  hardships  Jto  their  poli- 
cyholders; others,  being  unable  or  unwilling  to 
reform  their  methods,  have  failed.  Yet  others 
still  continue  upon  the  old  plans,  being  given 
a  longer  lease  of  life  than  their  fellows  because 
of  one  or  other  extraneous  interference  with 
the  normal  operation  of  the  plan. 

22 


ASSESSMENT  LIFE  INSURANCE    23 

Among  the  institutions  which  have  longest 
been  able  to  withstand  the  evil  effects  of  the 
erroneous  plan  are  the  fraternal  insurance  so- 
cieties, although  they  were  the  first  to  introduce 
it.  This  is  due  to  two  things,  viz. :  the  extraordi- 
nary economy  and  efficiency  of  their  democratic 
system  of  management,  and  the  vitality  which 
the  loyalty  and  strong  interest  of  their  individ- 
ual members  give  to  them.  On  this  account,  also, 
they  find  it  easier  to  pass  over  to  sound  plans 
than  have  assessment  societies,  which  were  con- 
ducted more  nearly  like  business  companies. 
The  fraternal  societies  as  a  whole  are  now  in  the 
midst  of  such  readjustment,  some  just  entering 
upon  it,  some  preparing  to  do  so,  and  others  just 
emerging.  In  spite  of  this,  they  are  each  year 
showing  a  large  increase  in  membership,  indi- 
vidual societies  suffering  a  loss  of  membership 
usually  only  for  a  short  time  in  consequence  of 
readjustment. 

We  are  not  here  concerned  with  the  history 
of  assessment  societies,  and  will  consider  only 
their  plans,  endeavouring  to  make  clear  wherein 
they  were  defective  and  how  the  errors  may  be 
overcome. 

The  original  assessment  plan  was  as  follows : 
Upon  the  death  of  a  member  one  dollar  was 
assessed  against  each  living  member,  from  the 
proceeds  of  which  was  paid  a  certain  sum  to  his 
beneficiary.    If  the  assessment  produced  more 


24    BUSINESS  OF  LIFE  INSURANCE 

than  this  sum,  the  remainder  was  held  and  ap- 
plied with  future  assessments  to  meet  future 
claims,  no  assessment  being  called  whenever  the 
funds  in  the  treasury  enabled  the  society  to  pay 
the  claim  without  recourse  to  a  levy.  If  the 
proceeds  of  one  assessment  were  not  enough  to 
pay  the  claim  in  full,  it  was  provided  that  only 
so  much  as  was  actually  realised  should  be  paid. 

Commercial  solvency  was  thus  assured  for 
the  society  beyond  peradventure.  It  could  not 
by  any  possibility  owe  more  than  it  could  pay, 
for  the  simple  and  sufficient  reason  that  it  prom- 
ised to  pay  only  what  it  could  collect. 

But,  of  course,  that  was  very  different  from 
what  the  members  were  led  to  expect.  In  the 
first  place,  after  the  society  grew  big  enough 
to  pay  a  claim  in  full,  the  members  considered 
the  question  settled  for  all  time  that  their  cer- 
tificates were  good  for  the  face  at  death.  In  the 
second  place,  after  the  society  had  been  operat- 
ing a  few  years  they  came  to  the  conclusion  that 
there  was  a  normal  death-rate  that  could  be 
maintained  and  would  keep  the  cost  from  in- 
creasing beyond  certain  limits,  the  new  mem- 
bers, *'new  blood,"  they  called  it,  keeping  down 
the  average  age  and  thus  limiting  the  cost.  In 
support  of  this  they  quoted  the  experience  of 
the  regular  companies,  which  often  show  a  more 
or  less  stable  death-rate  of  12  or  15,  for  instance, 
per  1,000  members. 


ASSESSMENT  LIFE  INSURANCE    25 

These  expectations  have  been  rudely  disap- 
pointed, and  the  institutions  which  could  not  in 
the  nature  of  things  become  commercially  in- 
solvent have  miserably  failed,  unless  reorgan- 
ised. This  result,  too,  was  only  to  be  expected. 
The  faults  of  the  plan  made  it  self-limiting. 
The  members  were  only  getting  that  sort  of  pro- 
tection cheap  which  can  always  be  had  cheap  in 
any  class  of  companies,  viz.,  temporary  insur- 
ance, not  extending  into  old  age ;  and  the  failure 
to  limit  the  insurance  by  contract  to  the  period 
before  old  age  supervenes  proved  in  the  end  the 
Nemesis  of  the  mistaken  societies.  Their  mem- 
bers confounded  short  term  insurance  with 
whole  life  insurance. 

Let  us  examine  the  plan  somewhat  closely. 
Its  unfairness  strikes  one  immediately.  Pro- 
tection is  given  an  entrant  at  40,  50  or  even  60 
or  older  in  some  associations,  at  the  same  rate 
of  assessment  as  at  age  18  or  20.  As  all  the 
money  is  being  at  once  expended  for  the  pay- 
ment of  death  claims,  and  as  the  insurance  is 
therefore  without  provision  to  meet  the  in- 
crease of  cost  in  later  years,  it  is  evident  that 
these  members  should  pay  that  year  in  propor- 
tion to  the  cost  at  their  present  ages,  i.  e.,  say 
according  to  the  American  Experience  Table, 
in  the  ratio  of  $7.81  per  $1,000  at  age  20,  $9.79 
at  age  40,  $13.78  at  50,  and  $26.69  at  60. 

I  have  said  **in  the  ratio,"  for,  of  course,  in 


26    BUSINESS  OF  LIFE  INSURANCE 

the  earlier  years  of  the  association,  when  the 
members  have  all  been  examined  very  recently, 
the  mortality  cost  should  not  be  so  high  as  these 
figures,  but  the  ratios  between  them  should  be 
about  the  same.  If  the  cost  was  two-thirds  as 
much,  but  eight  monthly  assessments  of  one- 
twelfth  of  these  amounts  apiece  would  need  to 
be  collected  from  each ;  if  three-fourths  as  much, 
then  nine  monthly  assessments,  and  so  on,  but 
preserving  the  ratios  of  cost. 

In  the  earlier  years  of  these  associations, 
however,  the  failure  to  charge  according  to  age 
made  little  or  no  difference,  as  far  as  the  popu- 
larity of  the  societies  was  concerned.  Owing 
to  the  fresh  medical  examinations  and  the  com- 
paratively low  average  ages  of  the  entrants  the 
mortality  was  low  enough  to  give  a  very  low 
rate,  much  lower,  of  course,  than  in  the  regular 
companies  on  the  level  premium  plan  with  which 
it  was  usually  compared.  The  managers  of  the 
societies  very  imperfectly  understood  the  nature 
of  the  forces  which  were  at  work,  and  had  a 
fatuous  disposition  to  believe  all  things  possible 
besides;  most  of  the  members  did  not  under- 
stand at  all,  or  were  quite  content  to  obtain  pro- 
tection so  cheaply  and  to  let  the  question  of  its 
permanency  take  care  of  itself.  A  common  say- 
ing was,  "It  will  last  as  long  as  I  need  it." 

Not  only  was  this  plan  unfair  at  the  outset; 
it  became  increasingly  so  as  the  years  went  by, 


ASSESSMENT  LIFE  INSURANCE    27 

both  to  the  members  admitted  early,  but  still 
remaining  at  young  ages,  and  also  more  par- 
ticularly to  the  very  new  members,  upon  the 
accession  of  whom,  according  to  its  own  cham- 
pions, the  prospects  for  permanency  depended. 
The  following  will  make  this  clear : 

Take  the  four  members  admitted  at  ages  20, 
40,  50,  and  60,  whom  we  have  already  used  for 
illustration,  and  observe  the  conditions  twenty 
years  later.  They  started  out  paying  the  same 
rates,  although  that  very  year  they  should  have 
paid  in  the  ratios  of  $7.61  for  20,  $9.79  for  40, 
$13.76  for  50,  and  $23.69  for  60.  Now  they  are 
each  twenty  years  older  and  they  are  still  pay- 
ing the  same  rates,  without  regard  to  age, 
though  now,  according  to  the  risk  of  death  for 
each  by  the  American  Experience  Table,  they 
should  be  paying  in  the  ratios  of  $9.79,  $26.60, 
$61.99  and  $144.47,  respectively. 

It  will  be  observ^ed  that,  not  only  is  the  young- 
est man  discriminated  against  more  and  more 
heavily,  but  also  that  the  annual  cost  to  be  met 
by  all  of  them  has  much  increased,  and  that, 
though  still  paying  assessments  at  the  same  rate 
as  at  the  outset,  they  will  be  paying  more  of 
them. 

Yet  more  unfair  was  the  plan  to  the  new  mem- 
ber, just  admitted  at  age  20,  who  is  now  put  on  a 
par  with  the  member  now  80  as  well  as  with  new 
members  at  ages  higher  than  himself. 


28    BUSINESS  OF  LIFE  INSURANCE 

The  consequence  of  this  could  not  fail  to  be 
increased  pressure  as  the  years  went  by,  the  dis- 
crimination against  the  younger  of  the  existing 
members  driving  them  out  through  motives  of 
self-interest,  and  the  discrimination  against  new 
members  causing  them  to  seek  protection  else- 
where, perhaps  in  some  newer  society  where 
these  influences  had  not  yet  made  themselves 
felt. 

Another  form  of  assessment  insurance  was  in- 
troduced after  a  time  which  seemed  to  many  of 
the  friends  of  the  system  to  answer  this  objec- 
tion. It  consisted  in  fixing  the  rates  of  assess- 
ments according  to  the  ages  upon  admission,  and 
is  known  as  the  graded  assessment  plan.  Pre- 
cisely as  under  the  other  plan,  there  was  to  be 
collected  currently  merely  enough  to  pay  the 
losses.  The  graduation  of  the  assessments  was 
usually  arbitrary,  but,  even  when  fixed  by  refer- 
ence to  a  mortality  table,  it  was  in  accordance 
with  the  death-rates  for  the  age  upon  admission. 
Let  us  consider  our  four  men  again.  They  will 
now  set  out  with  a  proper  rate  of  assessment  for 
the  first  year,  according  to  the  cost  at  their  re- 
spective ages,  i.  e.,  let  us  say,  in  the  ratios  of 
$7.81  for  age  20,  $9.79  for  age  40,  $13.78  at  50 
and  $26.69  for  60.  But  twenty  years  later,  they 
are  still  paying  the  same  ratios — not,  be  it  un- 
derstood, necessarily  these  amounts  per  annum, 
but  probably  more  because  of  the  increased 


ASSESSMENT  LIFE  INSURANCE    29 

aggregate  cost — while  now  the  actual  cost  of 
their  protection  is  in  the  ratios  of  $9.79,  $26.69, 
$61.99  and  $144.47,  respectively.  This  unfair- 
ness also  bears  yet  harder  upon  the  new  mem- 
bers who  are  assessed  the  first  year  at  correct 
ratios  as  among  themselves  but  very  incorrect 
in  comparison  with  the  old  members. 

Such  a  plan  would,  of  course,  by  starting  out 
the  first  year  with  a  fair  division  of  cost  and 
gradually  departing  from  it  as  it  was  longer  con- 
tinued, tend  to  give  the  society  a  longer  lease  of 
life  than  the  other.  But  it  is  also  plainly  not  of 
a  permanent  character  and  such  a  society  has 
within  it  the  seeds  of  necessary  dissolution,  un- 
less it  can  readjust  its  rates  upon  a  fairer  basis. 

Evidently  both  of  these  plans  would  fail  to 
pass  muster  if  submitted  to  the  crucial  test  of  a 
sound  and  permanent  plan,  set  forth  in  the  last 
article  of  this  series.  A  knowledge  of  the  appli- 
cability of  that  test  would  have  rendered  it  im- 
possible for  any  man  to  accept  the  assessment 
plan  as  permanent. 

There  is  a  third  form  of  assessmentism  which 
has  nothing  in  common  with  these  except  that 
the  right  of  unlimited  assessment  is  retained 
though  the  premiums  charged  are  in  excess  of 
the  current  cost  and  afford  for  a  time  at  least 
some  accumulation.  Only  too  often  this  has  been 
a  cover  for  insufficient  premiums,  and  these 
plans  must  be  judged  as  all  others  by  the  ade- 


30    BUSINESS  OF  LIFE  INSURANCE 

quacy  of  the  premium.  Wlietlier  it  is  adequate 
or  not  can  usually  be  discovered  by  learning 
whether,  voluntarily  or  otherwise,  the  company 
carries  the  full  legal  reserve,  counting  these  pol- 
icies as  what  they  purport  to  be,  in  which  case 
the  right  to  assess  is  not  likely  to  be  exercised 
and  may  be  disregarded,  but  in  order  to  know 
whether  the  policies  are  valued  as  what  they  pur- 
port to  be,  the  premiums  should  be  compared 
with  the  standard  net  premiums  by  the  Ameri- 
can Experience  Table  for  that  form  of  policy, 
because  in  reorganising  some  assessment  com- 
panies, departments  have  consented  to  treat  old 
policies  which  purport  to  be  whole  life,  as  term 
insurance  for  one  year  at  a  time.  It  is  also  neces- 
sary to  discover,  certainly,  whether  the  policy 
has  been  charged  with  a  lien  for  the  reserve  or 
for  deficiencies  in  past  premiums. 


CHAPTER  IV 

LEVEL  PREMIUM  COMPANIES 

The  first  form  of  life  insurance  was  assess- 
ment. Its  beginnings  are  ancient,  perhaps  even 
going  back  to  tl\e  early  Greek  days,  in  the 
funeral  benefits  paid  in  certain  guilds.  Notwith- 
standing the  defects  of  plan,  such  guilds  havo 
been  able  to  maintain  themselves  for  long  pe- 
riods, for  two  reasons,  one  that  they  offered 
other  important  and  exclusive  advantages  as  do 
trade  unions,  for  instance,  and  the  other  that  the 
benefits  and  the  payments  were  so  small  that  the 
want  of  equity  in  the  contributions  did  not  cause 
anybody  through  self-interest  to  quit  the  enter- 
prise, as  would  have  been  the  case,  had  the  dis- 
proportionate costs  and  benefits  been  on  a  larger 
scale. 

Likewise,  the  first  attempt  at  whole  life  insur- 
ance was  on  the  assessment  plan.  A  company, 
called  *'The  Amicable  Corporation,"  was  char- 
tered in  London  in  1705,  which  conducted  its 
business  on  the  following  basis,  viz. :  Members 
were  received  up  to  45  years  of  age.    Each  paid 

SI 


32    BUSINESS  OF  LIFE  INSURANCE 

in  the  same  sum  at  the  beginning  of  each  year. 
At  the  end  of  the  year  the  funds  on  hand  were 
divided  among  the  beneficiaries  of  the  members 
who  had  died  during  the  year.  With  many 
changes  of  plan  and  adjustments  of  rates  and 
benefits,  this  company  survived  until  1866,  in 
which  year  it  passed  out  of  existence  by  reinsur- 
ing all  of  its  outstanding  risks  in  a  solvent  com- 
pany. It  had  long  before  eschewed  the  assess- 
ment plan,  however,  and  was  operating  on  the 
level  premium  plan,  but  the  effects  of  its  long 
continuance  on  an  unsound  plan  had  been  un- 
favourable to  its  success. 

In  1722  charters  were  granted  to  two  insur- 
ance companies,  the  Royal  Exchange  and  Lon- 
don Assurance,  to  be  organised  upon  a  stock 
basis  and  to  transact  all  forms  of  insurance,  in- 
cluding the  insurance  of  lives.  But  these  com- 
panies, which,  by  the  bye,  are  yet  flourishing, 
undertook  nothing  but  short  term  insurance  at 
very  high  rates. 

About  the  middle  of  the  eighteenth  century 
the  idea  of  founding  a  new  company  on  the  mu- 
tual plan  to  supply  insurance  for  the  whole  pe- 
riod of  life  at  level  rates  of  premium,  fixed  by 
the  age  at  entry,  was  brought  forward  by 
Thomas  Simpson,  whom  the  Encyclopaedia  Brit- 
tanica  calls  "the  greatest  non-academical  mathe- 
matician that  England  has  ever  produced,"  and 
James  Dodson,  formerly  a  professor  of  mathe- 


LEVEL  PREMIUM  COMPANIES      33 

matics  in  one  of  the  universities,  by  means  of 
public  lectures  in  London,  upon  the  subject  of 
life  insurance  from  a  technical  standpoint,  as 
well  as  a  practical.  Simpson  was,  in  fact,  the 
discoverer  of  the  method  of  computing  a  correct 
level  premium,  although  the  manner  of  comput- 
ing the  value  of  an  annuity  had  been  understood 
for  a  half  century  already. 

Sufficient  support  having  been  secured  to  war- 
rant it,  application  was  made  to  Parliament  for 
a  charter.  It  was  opposed  both  by  the  Amicable 
Corporation,  which  asserted  that  its  charter  was 
intended  to  be  exclusive,  so  far  as  mutual  life 
insurance  was  concerned,  and  by  both  the  stock 
companies,  on  the  ground  that  it  would  not  be 
right,  after  granting  them  charters  under  which 
only  a  very  small  and  unprofitable  business  had 
been  secured  or  could  be  secured,  to  open  the 
door  to  a  new  company  which  would  compel  a 
further  division  of  this  very  limited  business. 

All  these  companies  also  objected  to  the  grant- 
ing of  the  charter  on  the  ground  that  the  level 
premium  plan  was  an  untried  and  very  ques- 
tionable experiment  which  the  ignorant  public 
should  not  be  encouraged  to  essay. 

Curiously  enough,  nearly  seventy-five  years 
later  the  New  York  Life  and  Trust  Company, 
which  has  now  long  ago  ceased  to  do  a  life  insur- 
ance business  at  all,  appeared  in  Albany  in  1833 
to  protest  against  the  granting  of  a  life  insur- 


24    BUSINESS  OF  LIFE  INSURANCE 

ance  charter  on  the  chief  ground  named  by  the 
two  stock  companies. 

The  commissioners  to  whom  Parliament  re- 
ferred the  question,  reported  that  in  view  of  the 
untried  and  much  questioned  plan  proposed  to 
be  used,  they  recommended  that  no  charter  be 
granted  and  also  expressed  the  opinion  that  the 
promoters  should  be  required  to  show  their 
faith  in  the  proposition  by  putting  up  ample 
capital.  In  closing,  they  clinched  their  argu- 
ment by  stating  that  if  the  organisers  were 
really  anxious  to  prove  that  their  views  were 
correct,  they  might,  under  the  common  law,  form 
**an  unincorporated  voluntary  association,"  in 
plain  English,  an  unlimited  liability  partner- 
ship. And  that  is  what  they  did,  forming  the 
"Equitable  Society  for  the  Assurance  of  Lives 
and  Survivorships,"  now  known  as  the  Equita- 
ble Life  Assurance  Society  of  London,  in  the 
year  1762.  This  was  the  first  level  premium 
company. 

It  is  noteworthy  that  the  arguments  put  for- 
ward also  by  the  parliamentary  commission, 
viz.:  that  every  life  insurance  company,  even 
though  on  a  mutual  plan,  should  have  a  guar- 
antee capital,  has  more  than  once  been  put  for- 
ward since  that  time  and  the  statute  books  of 
nearly  every  state  to-day  contain  prohibitions 
of  the  organisation  of  new  mutual  companies — 
a  thing  which  had  an  important  influence  in 


LEVEL  PREMIUM  COMPANIES      35 

turning  the  energies  of  men  into  founding  as- 
sessment societies  and  has  also  resulted  in  con- 
tests as  to  the  ultimate  control  of  companies 
which  are  stock  in  form,  though  mutual  in  their 
operations. 

The  rates  of  the  Equitable  of  London  were 
based  upon  a  mortality  table,  deduced  from  the 
mortality  bills  of  London  and  constructed  by 
Simpson.  Fortunately  for  the  experiment,  this 
table  was  higher  than  the  company's  experience 
proved  to  be  and  the  rates,  therefore,  were  re- 
dundant. In  the  Deed  of  Settlement  provision 
had  been  made  both  for  distributing  a  surplus 
and  for  assessing  for  a  deficiency ;  but  it  was  as 
true  then  as  now  and  ever  that  it  is  much  easier 
to  deal  with  a  surplus  than  with  a  deficiency. 
The  next  table  adopted  was  the  famous  North- 
ampton which  called  for  a  large  reduction  in 
premiums  and  was  applied  with  many  misgiv- 
ings and  with  a  special  addition  to  the  premiums 
for  contingencies.  It  transpired,  however,  that 
this  table  was  also  higher  than  was  needed. 

In  view  of  the  grave  doubts  which  many  men 
of  affairs  harboured  of  the  feasibility  of  the 
Equitable 's  plan,  it  is  especially  fortunate  that 
the  mistake  was  charging  more  than  was  re- 
quired. Had  it  been  otherwise  and  the  life  in- 
surance assumptions  proved  too  low,  as,  for  in- 
stance, the  same  table  applied  to  annuitants 
proved  unprofitable  or  the  statistics  upon  which 


3G    BUSINESS  OF  LIFE  INSURANCE 

early  rates  for  health  insurance  were  based 
proved  misleading,  it  might  have  been  many- 
years  before  level  premium  life  insurance  be- 
came successful. 

Instead,  the  success  of  the  Equitable  was 
prompt  and  complete,  and  as  its  resources  in- 
creased and  especially  as  its  dividends  and 
bonuses  to  policyholders  increased,  it  became 
very  popular  and  many  other  companies  were 
organised  upon  similar  lines.  The  Equitable  is 
in  existence  to-day,  as  efficient  as  ever,  with 
about  $25,000,000  assets  and  paying  excellent 
bonuses.  It  shut  its  doors  to  new  members  en- 
tirely at  one  time,  but  for  many  years  has  re- 
ceived them  on  favourable  terms.  From  its  foun- 
dation to  the  present  time,  it  has  never  paid  or 
allowed  a  commission  or  a  salary  or  any  other 
compensation,  direct  or  indirect,  for  procuring 
new  business.  Its  growth  is  slow,  the  new  busi- 
ness amounting  only  to  $1,000,000  or  $2,000,000 
per  annum,  which  looks  small,  and  is  small,  but 
does  not  prevent  the  company  giving  most  ex- 
cellent returns.  The  small  new  business  is  in 
the  main,  in  fact,  a  reflection  upon  the  ability  of 
men  to  ''attend  to  their  own  business"  life  in- 
surance-wise, without  the  persuasive  interven- 
tion of  agents.  There  are  other  companies,  also, 
which  do  not  employ  agents,  and  their  patronage 
is  similarly  small.  Under  present-day  condi- 
tions, it  is  unlikely  that  any  more  will  be  estab- 


LEVEL  PREMIUM  COMPANIES      37 

lished  to  operate  on  that  plan,  but  level  premium 
life  insurance  is  now  nowhere  regarded  an  ex- 
periment. It  is,  instead,  a  very  symbol  for 
strength  and  solvency. 


CHAPTEE  V 

RESERVES,  NATURE  OF  AND  NECESSITY  FOR 

A  FEATURE  of  all  soiind  plans  of  life  insurance 
excepting  only  the  plan  of  premiums  increasing 
as  the  cost  increases — which  also  is  certainly 
not  sound,  as  has  been  seen,  unless  merged  into 
a  level  premium  plan  or  discontinued  before  old 
age — involves  the  payment  during  the  earlier 
years  of  more  than  the  insurance  costs  currently 
in  order  to  avoid  increasing  the  premium  with 
the  increasing  cost.  A  level  premium,  to  cover 
an  increasing  hazard,  converging  into  certainty 
of  loss,  as  does  a  whole  life  premium,  calls  for 
an  accumulation  of  the  excess  of  the  premium 
over  the  current  cost  during  the  earlier  years, 
the  drawing  back  from  this  accumulation  and 
its  interest  during  the  later  years  and  the  final 
application  of  the  entire  fund  toward  paying  the 
insured's  own  claim  whenever  his  death  takes 
place. 

This  accumulation  is  called  the  reserve. 

Considered  as  an  aggregate,  the  reserves  of  a 
life  insurance  company  may  be  thought  of  in  two 

38 


NECESSITY   FOR   RESERVES       39 

ways,  each  of  which  has  a  special  significance 
and  helps  to  explain  the  nature  and  function  of 
the  reserve. 

From  one  aspect,  the  reserve  is  called  the  un- 
earned premium  reserve.  This  means  that  the 
experience  of  the  company  being  precisely  as 
was  assumed  in  computing  the  net  premiums,  as 
to  mortality  and  interest,  there  should  remain 
on  hand  after  meeting  all  death  claims  a  certain, 
definitely  ascertainable  sum  of  money  which 
should  be  reserved  on  the  principle  that  all  the 
net  premiums  have  been  paid  for  insurance  and 
that  so  much  of  them  and  their  accumulations  as 
are  represented  by  the  reserves  has  not  been 
earned.  The  principle  is  the  same  as  that  the 
pro  rata  premiums  of  a  fire  insurance  company 
up  to  the  expiration  of  the  policies  have  not  been 
earned  and  should  be  reserved. 

The  other  aspect  is  that  of  a  reinsurance  re- 
serve, by  which  is  not  meant  the  amount  which 
another  company  might  conceivably  accept,  in 
fact,  in  addition  to  the  future  premiums,  in  order 
to  take  over  the  business,  but  what  it  would  re- 
quire if  the  premiums  receivable  were  the  net 
premiums,  if  interest  and  mortality  were  pre- 
cisely as  originally  assumed  and  if  no  expenses 
were  contemplated.  The  reason  for  this  may  ap- 
pear more  clearly  hereafter.  But  the  chief  rea- 
son is  because  the  purpose  of  the  reserve  is  not 
primarily  merely  to  enable  a  company  to  secure 


40    BUSINESS  OF  LIFE  INSURANCE 

reinsurance,  but  instead  to  enable  it  to  carry 
out  its  own  obligations  on  the  basis  originally 
agreed  upon.  The  expression  "reinsurance  re- 
serve, ' '  therefore,  is  only  an  expression  intend- 
ed to  indicate  the  necessity  for  a  reserve. 

Another  mode  of  saying  much  the  same  thing 
is  by  the  use  of  two  terms  employed  by  actuaries 
to  signify  two  modes  of  computing  the  required 
reserves,  viz.:  ''retrospective"  and  "prospec- 
tive. ' '  The  former  has  reference  to  the  deriva- 
tion and  the  latter  to  the  uses.  The  former  mode 
is  by  calculating  how  much  would  remain  of  the 
net  premiums  paid  in  the  past,  with  their  accu- 
mulations, the  experience  as  to  interest  and  mor- 
tality being  precisely  as  assumed,  and  the  latter 
by  calculating  the  amount  needed  in  the  future, 
together  with  its  accumulations  and  with  the 
future  net  premiums,  to  enable  the  company  to 
pay  its  claims,  the  experience  in  the  future  as  to 
interest  and  mortality  being  precisely  as  as- 
sumed. 

It  is  frequently  urged  that  there  is  no  such 
thing  as  an  individual  reserve.  The  argument 
is  that  the  liability  as  to  particular  policies  of 
the  same  kind  and  of  the  same  duration  upon 
persons  of  the  same  age  is  in  no  two  cases  the 
same.  For  instance,  one  of  them  may  be  dying, 
so  that  no  more  premiums  can  be  expected  from 
him,  while  the  payment  of  his  death  claim  is  im- 
minent ;  and  another  may  be  in  as  good  physical 


NECESSITY  FOR  RESERVES   41 

condition  as  when  he  was  accepted.  There  is 
something  in  this  contention,  also,  and  it  has 
some  bearing  upon  the  question  of  surrender 
values  and  also  upon  the  question  of  initial  ex- 
penses, as  we  shall  see.  Yet  it  is  possible  to 
show,  by  considering  the  individual  as  a  micro- 
cosm of  the  company  as  a  macrocosm,  as  it  were, 
or,  in  other  words,  as  an  average  individual  of 
his  age  and  class,  how  the  individual  reserve 
may  be  computed  and  the  function  which  it  ful- 
fills. 

Let  us  first  consider  it  from  the  retrospective 
view.  Out  of  the  premium  paid,  accumulated  for 
one  year  at  the  assumed  rate  of  interest,  deduct 
the  cost  of  the  first  year's  actual  insurance,  i.  e., 
of  an  insurance  equal  to  the  face  of  the  policy 
less  the  reserve  at  the  end  of  the  year.  The  re- 
mainder will  be  the  reserve  itself.  The  neces- 
sary changes  in  order  to  make  this  a  practicable 
process  are  simple  and  will  not  be  further  dis- 
cussed here. 

Then  from  the  prospective  view,  the  reserve 
is  that  sum  which  together  with  interest  upon 
itself  and  the  premiums  to  be  paid  in  future,  will 
meet  the  charges  on  the  basis  assumed  for  future 
costs  of  insurance  as  defined,  throughout  the  life 
of  the  policy,  and  will  be  applied  to  help  pay  the 
claim  upon  the  decease  of  the  insured. 

It  will  be  observed  that  both  of  these  views 
have  reference  to  the  policy  as  a  going  contract 


42    BUSINESS  OF  LIFE  INSURANCE 

and  are  correct  when  it  is  so  considered,  because 
in  that  case,  in  charging  for  the  insurance,  all 
are  treated  as  average  risks,  without  regard  to 
their  then  state  of  health.  There  might  be  oc- 
casion to  view  the  matter  somewhat  differently, 
perhaps,  when  the  policy  is  being  surrendered 
upon  a  life  presumably  or  certainly  in  good 
health  or  upon  a  life  known  to  be  moribund.  In 
the  former  a  surrender  charge  may  be  justified 
and  in  the  latter  a  payment  much  in  excess  of  the 
reserve ;  but  this  does  not  seem  to  alter  the  pro- 
priety of  considering  the  reserve  to  be  individ- 
ual until  some  such  disposition  is  called  for. 

This  individual  reser^^e  is  important  because 
it  enables  the  insured  to  see  precisely  in  what 
way  his  money  accumulates,  what  disposition  is 
made  of  it  in  the  matter  of  paying  for  his  insur- 
ance, including  the  disposition  which  is  made  in 
event  of  his  death,  which  unless  this  be  under- 
stood, is  always  a  good  deal  of  a  mystery,  and 
the  necessity  for  maintaining  and  guarding  it. 

The  aggregate  reserve  which  is  the  policy  lia- 
bility of  the  company,  is  equal  to  the  sum  of 
these  individual  reserves,  though  it  may  be  sepa- 
rately computed  without  arriving  at  the  individ- 
ual reserves  by  calculating  on  the  one  hand  the 
liability  of  the  company  on  the  basis  of  no  fur- 
ther premiums  receivable  (which  is  the  sum  of 
the  net  single  premiums  at  the  attained  ages, 
manifestly)  and  deducting  therefrom  the  pres- 


NECESSITY  FOR  RESERVES   43 

ent  value  of  all  net  premiums  receivable  in  fu- 
ture (which  is,  of  course,  these  net  premiums, 
multiplied  in  each  case  by  the  appropriate  value 
of  a  payment  of  $1.00  per  annum  for  life) .  Or 
it  may  be  computed  by  first  ascertaining  the  in- 
dividual reserves  and  then  merely  adding  them 
together  and,  if  the  work  has  been  accurately 
done,  the  result  will  be  the  same  in  either  case. 

In  Great  Britain  the  aggregate  system  is  in 
vogue  and  valuation  is  treated  as  a  taking  of 
stock  to  be  independently  undertaken,  usually 
once  every  five  years.  It  is  claimed  for  the  sys- 
tem that  it  is  more  nearly  self-explanatory,  the 
present  value  of  the  obligations  and  of  the  pre- 
miums being  separately  set  out  in  the  reports, 
and  also  that  it  involves  less  time  and  labor. 
There  is  something  in  each  of  these  claims, 
though,  as  to  the  latter,  the  class  of  labour  re- 
quired to  make  a  good  group  or  aggregate  valu- 
ation is  more  skilled  and  better  paid  than  the 
clerks  who  fill  in  sheets  in  a  seriatim  valuation, 
and  as  to  the  former,  what  is  gained  in  clearness 
as  to  the  meaning  of  the  reserve  is  perhaps  off- 
set by  the  diflBculty  the  layman  has  in  discover- 
ing what  reserve  is  held  against  his  own  policy. 
Some  companies  might  not  think  that  an  objec- 
tion, however. 

In  the  United  States  practically  all  valuations 
are  seriatim.  Tables  of  individual  reserves  are 
prepared  and  from  these  the  valuation  sheets 


44    BUSINESS  OF  LIFE  INSURANCE 

are  filled  out,  showing  the  reserve  for  each  pol- 
icy. These  are  added  up  and  the  total  is  return- 
ed as  the  reserve.  The  checking  is  easy  and  the 
liability  to  error  very  little.  The  facility  of  mak- 
ing the  valuation  is  such  that  all  companies  are 
valued  every  year,  many  of  them  oftener  than 
once  a  year ;  and  a  few  contrive  by  a  system  of 
reserve  bookkeeping  to  keep  track  of  their  re- 
serves day  by  day,  or  at  furthest  month  by 
month.  This  may  indicate  that,  while  theoreti- 
cally the  group  process  should  be  shortest  and 
easiest,  in  practice  the  contrary  is  true.  An- 
other advantage  is  that  the  seriatim  system 
makes  for  uniformity ;  the  variations  under  the 
aggregate  system,  caused  by  the  employment  of 
different  ' '  short  cuts ' '  are  sometimes  very  con- 
siderable. 


CHAPTER  VI 

THB  PABTITION  OF   THE  PBEMIUM 

Some  years  ago  an  erroneous  impression  was 
created  in  the  minds  of  many  who  were  inter- 
ested in  the  principles  of  life  insurance  by  the 
statement  in  a  very  clever  book  upon  the  sub- 
ject, that  a  life  insurance  premium  is  separable 
into  three  ''elements,"  viz.:  expense,  mortality 
and  reserve.  The  misinformation  which  this 
conveyed  was  not  so  much  in  the  bare  statement 
as  in  the  inferences  which  would  naturally  be 
made  and  were  in  fact  generally  made  after 
reading  it.  And  the  erroneous  impression  was 
made  more  definite  by  printing  as  an  illustration 
a  page  of  figures,  showing  the  separation  of 
whole  life  premiums  into  these  "elements." 

One  would  naturally  understand,  of  course, 
from  the  foregoing  statement,  that  a  certain 
fixed  percentage  of  each  premium  is  expected  to 
be  used  for  expenses,  that  another  definite  por- 
tion is  used  to  pay  current  death-losses  and  yet 
another  to  accumulate  into  a  reserve.  If  this 
were  true,  as  stated,  can  one  conceive  what  the 

4S 


46    BUSINESS  OF  LIFE  INSUEANCE 

reserve  could  be  for?  To  pay  the  certain  claim, 
if  one  lives  to  the  end  of  the  table,  was  the  an- 
swer given.  But  in  that  case  and  if  all  the  death- 
losses  are  paid  by  the  mortality  "element,'* 
what  is  done  with  the  policy's  reserve  when  the 
insured  dies? 

These  questions  the  readers  of  this  series 
should  already  be  able  to  answer;  but  the  idea 
that  the  reserve  is  "the  fifth  wheel  of  a  waggon" 
naturally  got  abroad  very  promptly  after  this 
book  appeared. 

The  following  explanation  is  needed  to  correct 
these  false  impressions :  It  is  true  that  usually, 
though  by  no  means  always,  a  certain  part  of 
each  premium,  the  same  every  year,  except  that 
some  companies  make  it  larger  for  the  first  year, 
is  ' '  loading, ' '  added  to  a  net  premium,  sufficient 
merely  to  provide  the  guaranteed  benefits,  in 
case  the  assumed  rate  of  interest  and  assumed 
mortality  is  exactly  realised,  for  the  purpose  of 
providing  a  fund  from  which  expenses  may  be 
paid,  contingencies  be  met  and  dividends  to 
policyholders  be  derived  in  part.  But  this  load- 
ing is  not  by  any  means  either  the  measure  of 
justifiable  expenditure  as  to  the  individual  pol- 
icy, nor  when  it  is  the  full  loading  on  full  par- 
ticipating premiums  is  it  fairly  expected  that 
the  expenses  will  absorb  all  of  it. 

But  the  worst  misconception  is  as  to  the  divis- 
ion  of  the  net  premiu.^  Into  "mortality"  and 


PARTITION  OF  THE  PREMIUM     47 

* '  reserve. ' '  The  illustration  printed  in  the  book 
gave  this  division  as  it  really  stands  for  just 
one  year,  the  first  after  the  policy  is  issued.  The 
''mortuary  element"  was  the  cost  of  the  insur- 
ance for  that  year,  that  is,  the  cost  of  carrying 
an  insurance  equal  to  the  face  of  the  policy  less 
the  reserve  at  the  end  of  the  year,  mortality  be- 
ing according  to  the  table  for  that  age.  The  next 
year  the  net  actual  insurance  would  be  smaller 
and  the  mortality  rate  larger;  in  consequence 
the  ''mortality  element,"  or  cost  of  insurance, 
would  be  different,  and,  since  the  amount  which 
remains  in  reserve  is  the  remainder  of  the  net 
premium,  which  does  not  differ  in  amount  from 
year  to  year,  it  follows  that  the  "reserve  ele- 
ment" differed  also  from  the  amount  of  the  year 
before.  And  so  from  year  to  year,  the  line  be- 
tween the  mortality  and  reserve  "elements" 
shifts.  On  an  ordinary  life  policy,  after  the 
lapse  of  years,  the  "mortality  element"  comes 
to  exceed  the  whole  net  premium,  and  each  year 
something  is  withdrawn  from  the  reserve  accu- 
mulated, in  order  to  enable  the  policy  to  meet 
its  share  of  the  company  *s  death-losses. 

The  following  is  an  illustration  of  this,  by  the 
Actuaries'  Table  and  4  per  cent.,  taken  from 
Elizur  Wright's  "Savings  Bank  Life  Insur- 
ance": 


48    BUSINESS  OF  LIFE  INSURANCE 

AOTU ABIES '  TABLE,  4  PEB  CENT.  INTEBEST — ^DBATH 
ONLY. 

Age  at  entry,  32.  Gross  premium  $24.10.  Net 
premium,  $18.04. 


Year 
of  Pol 
0 

-    Insurance    - 
Normal 
Costs  of 
.  Margin.  Insurance. 

6.06        8.33 

Com- 
pany's 
Risks. 

989.90 

1 — Self-Insurance — » 
Deposits.        Reserve. 

9.71 

1 

6.06 

8.40 

979.47 

9.64 

10.10 

2 

6.06 

8.47 

968.70 

9.57 

20.53 

3 

6.06 

8.55 

957.58 

9.49 

31.30 

4 

6.06 

8.63 

946.10 

9.41 

42.42 

5 

6.06 

8.70 

934.23 

9.34 

53.90 

6 

6.06 

8.78 

921.97 

9.26 

65.77 

7 

6.06 

8.86 

909.30 

9.18 

78.03 

8 

6.06 

8.93 

896.20 

9.11 

90.70 

9 

6.06 

9.01 

882.66 

9.03 

103.80 

10 

6.06 

9.10 

868.67 

8.94 

117.34 

11 

6.06 

9.24 

854.26 

8.80 

131.33 

12 

6.06 

9.44 

839.48 

8.60 

145.74 

13 

6.06 

9.68 

824.36 

8.36 

160.52 

14 

.6.06 

9.98 

808.95 

8.06 

175.64 

15 

6.06 

10.09 

793.27 

7.95 

191.05 

16 

6.06 

10.66 

777.32 

7.38 

206.73 

17 

6.06 

11.02 

761.11 

7.02 

222.68 

18 

6.06 

11.41 

744.66 

6.63 

238.89 

19 

6.06 

11.83 

727.99 

6.21 

255.34 

20 

6.06 

12.27 

711.10 

5.77 

272.01 

21 

6.06 

12.74 

694.03 

5.30 

288.90 

PARTITION  OF  THE  PREMIUM     49 


r 

Year 
of  Pol 

22 

1.  Margin. 

6.06 

[nsurance 

Normal 

Costs  of 

Insurance. 

13.22 

Com- 
pany's 
Risks. 

676.78 

1 — Self-Insttrance— » 
Deposits.         Reserve. 

4.82        305.97 

23 

6.06 

13.74 

659.38 

4.30 

323.22 

24 

6.06 

14.27 

641.83 

3.77 

340.62 

25 

6.06 

14.81 

624.14 

3.23 

358.17 

26 

6.06 

15.38 

606.34 

2.66 

375.86 

27 

6.06 

15.98 

588.45 

2.06 

393.66 

28 

6.06 

16.64 

570.53 

1.40 

411.55 

29 

6.06 

17.33 

522.61 

.71 

429.47 

30 

6.06 

18.06 

534.73 

—    .02 

447.39 

31 

6.06 

18.81 

516.92 

—    .77 

465.27 

32 

6.06 

19.60 

499.22 

—  1.56 

483.08 

33 

6.06 

20.41 

481.65 

—  2.37 

500.78 

34 

6.06 

21.26 

464.26 

—  3.22 

518.35 

35 

6.06 

22.13 

447.08 

—  4.09 

535.74 

36 

6.06 

23.01 

430.13 

—  4.97 

552.92 

37 

6.06 

23.89 

413.42 

—  5.85 

569.87 

38 

6.06 

24.79 

396.98 

—  6.75 

586.58 

39 

6.06 

25.69 

380.82 

—  7.65 

603.02 

40 

6.06 

26.60 

364.96 

— ,  8.56 

619.18 

41 

6.06 

27.51 

349.41 

—  9.47 

635.04 

42 

6.06 

28.43 

334.19 

—10.39 

650.59 

43 

6.06 

29.34 

319.31 

—11.30 

665.81 

44 

6.06 

30.24 

304.77 

—12.20 

680.69 

45 

6.06 

31.14 

290.58 

—13.10 

695.23 

46 

6.06 

32.06 

276.78 

—14.02 

709.42 

47 

6.06 

32.93 

263.34 

—14.89 

723.22 

48 

6.06 

33.79 

250.25 

—15.75 

736.66 

49 

6.06 

34.58 

237.46 

—16.54 

749.75 

50    BUSINESS  OF  LIFE  INSURANCE 


Year 
of  Pol 

50 

Insurance 

Normal 
Costs  of 

.  Margin.  Insurance. 

6.06      35.29 

Com- 
pany's 
Risks. 

224.90 

t — Self-Insurance — » 
Depositfl.        Reserve. 

—17.25        762.54 

51 

6.06 

35.95 

212.52 

—17.91 

775.10 

52 

6.06 

36.52 

200.54 

—18.48 

787.48 

53 

6.06 

37.08 

188.05 

—19.04 

799.76 

54 

6.06 

37.64 

175.95 

—19.60 

811.95 

55 

6.06 

38.18 

163.93 

—20.14 

824.05 

56 

6.06 

38.78 

152.06 

—20.74 

836.07 

57 

6.06 

39.48 

140.44 

—21.44 

847.94 

58 

6.06 

40.18 

129.08 

—22.14 

859.56 

59 

6.06 

40.99 

118.11 

—22.95 

870.92 

60 

6.06 

41.98 

107.73 

—23.94 

881.89 

61 

6.06 

43.14 

98.14 

—25.10 

892.27 

62 

6.06 

44.44 

89.52 

—26.40 

901.86 

63 

6.06 

46.40 

82.60 

—28.36 

910.48 

64 

6.06 

48.17 

77.24 

—30.13 

917.40 

65 

6.06 

46.65 

70.08 

—28.61 

922.76 

66 

6.06 

40.75 

56.50 

—22.71 

929.92 

67 

6.06 

.00 

.00 

—18.04 

943.50 

68 

.... 

1,000.00 

It  will  be  observed  also  that  the  "cost  of  in- 
surance" or  so-called  ''mortality  element"  does 
not  pay  for  insurance  for  the  whole  amount  of 
the  policy,  but  only  for  that  amount  less  the  re- 
serve upon  the  policy,  which  reserve  is  applied 
toward  paying  the  claim.  And  this  also  indi- 
cates that  the  aggregate  amount  of  the  "mortal- 
ity elements"  do  not  pay  all  the  death-losses,but 


PAETITION  OF  THE  PREMIUM     51 

only  the  death-losses,  less  the  reserves  upon  the 
respective  policies. 

These  facts  having  been  once  comprehended, 
it  is  apparent  what  mischief  the  misconceptions 
would  work.  The  misconception  about  loading 
has  led  many  an  ill-advised  manager  to  consider 
the  whole  amount  paid  in  by  policyholders  as 
loading,  legitimate  spoils, instead  of  saving  some 
part,  if  possible,  for  dividends.  And  the  errone- 
ous impression  that  losses  were  paid  entirely 
from  the  ''mortality  element"  gave  rise  to  a 
peculiar  form  of  assessment  life  insurance  which 
was  in  fact  an  attempt  to  do  a  level  premium  life 
insurance  business  under  a  charter,  permitting 
unlimited  assessments,  but  at  premiums  design- 
ed and  represented  to  be  level,  though  they  were 
inadequate  and  could  not  possibly  carry  the  con- 
tracts through. 

From  the  erroneous  impression,  also,  that  the 
reserve  was  only  a  needless  excrescence  there 
arose  a  form  of  reserve  which  was  represented 
to  be  superior,  because  not  a  liability.  It  con- 
sisted in  collecting  a  percentage  addition  to  the 
''mortality  element"  which  should  be  reserved 
in  a  special  fund  for  contingencies,  such  as 
"mortality  beyond  the  table,"  "a  death-rate 
higher  than  10  per  1,000,"  or  what  you  will.  All 
of  these,  of  course,  wholly  missed  the  real  im- 
port of  the  reserve,  which  is  to  maintain  the  pre- 
mium level,  although  the  hazard  is  increas- 


52    BUSINESS  OF  LIFE  INSURANCE 

ing  and  will  ultimately  become  a  certainty  of 
loss. 

On  these  plans  several  large  and  apparently 
flourishing  societies  were  built  up  and  their  re- 
organisation upon  sound  plans  or  their  utter 
failure  has  been  one  of  the  features  of  the  last 
decade. 


CHAPTER  Vn 

KINDS  OP  LIFE  INSUBANCE  POLICIES 

Up  to  this  time  the  only  forms  of  life  insur- 
ance policies  considered  have  been  those  which 
are  payable  only  upon  the  death  of  the  insured 
and  premiums  for  which  are  payable  throughout 
life,  either  by  the  same  amount  each  year  or  by 
increasing  premiums  as  the  risk  of  death  in- 
creases or  by  assessments  the  same  for  all  ages 
or  fixed  according  to  age  at  entry.  Of  these  we 
have  found  only  the  first-mentioned  to  be  entire- 
ly and  permanently  feasible. 

In  the  course  of  the  reasoning  which  has  made 
this  clear,  we  have  incidentally  shown  how  to 
find  the  net  single  premium  for  such  an  insur- 
ance, i.  e.,  the  sum  which,  paid  in  advance,  will 
supply  funds  to  pay  for  the  insurance  through- 
out the  life  of  the  insured.  We  also  found  that 
the  way  to  compute  the  net  annual  premium  re- 
quired was  to  find  this  net  single  premium  first 
and  then  divide  it  by  the  present  value  of  $1.00 
each  year,  so  long  as  the  insured  lives,  which 
iwill  give  the  number  of  dollars  each  year  as  long 


54    BUSINESS  OF  LIFE  INSURANCE 

as  the  insured  lives,  that  are  equal  in  present 
value  to  the  net  single  premium  or  present  value 
of  all  that  will  be  required  to  pay  for  the  insur- 
ance for  the  lifetime  of  the  insured. 

But  it  may  be  desired  to  pay  for  the  insurance 
in  some  other  way  than  either  in  advance  or  by 
annual  premiums  as  long  as  the  insured  lives,  as, 
for  instance,  by  annual  premiums  for  ten  years, 
fifteen  years  or  twenty  years. 

In  order  to  compute  these  it  is  only  necessary 
to  calculate  what  the  present  value  is  of  $1.00 
each  year  in  advance  that  the  insured  lives,  but 
not  beyond  ten,  fifteen  or  twenty  years,  respec- 
tively. Then  divide  the  net  single  premium  by 
this  to  find  out  how  many  dollars,  payable  in  this 
manner,  have  the  same  present  value  as  the  cost 
of  the  insurance  throughout  the  life  of  the  in- 
sured. 

Of  course,  if  the  premiums  are  payable  in  this 
manner,  the  cost  of  insurance  each  year  will  be 
less  than  on  a  whole  life  policy  issued  at  the 
same  age  at  annual  premiums, because  the  actual 
insurance  is  less.  The  actual  insurance,  it  must 
be  remembered,  is  the  face  of  the  policy,  less  the 
reserve,  and  the  reserve  on  the  limited  payment 
policy  is  larger.  The  portion  of  each  premium 
which  goes  to  reserve  is  larger,  both  because  the 
net  premium  itself  is  larger  and  also  because  the 
amount  deducted  for  current  cost  of  insurance  is 
smaller.    Of  course,  after  the  premium-paying 


LIFE  INSURANCE  POLICIES       55 

period  has  elajosed,  all  the  cnrrent  costs  of  the 
insurance  are  deducted  from  the  accumulations 
of  the  reserve. 

Since  the  net  single  premium  is  the  present 
value  of  all  of  the  future  costs  of  insurance,  and 
since  after  no  further  premiums  are  to  be  paid 
the  company  must  have  in  hand  at  all  times  for 
the  protection  of  the  policy  the  present  value  of 
all  future  costs  of  its  insurance,  it  follows  that 
the  reserve  on  a  paid-up  policy  at  the  end  of  any 
policy  year  is  just  the  net  single  premium  for 
the  age  attained. 

It  follows,  also,  that  a  net  single  premium  pro- 
duces each  year  income  enough  to  meet  the  cur- 
rent cost  of  the  insurance  charged  against  it  and 
also  to  augment  it  to  the  amount  of  the  net  single 
premium  at  an  age  one  year  higher. 

Policies  are  also  issued  for  short  terms  at  an- 
nual or  single  premiums.  To  calculate  the  single 
premium,  the  annual  costs  of  the  protection 
throughout  the  tei-m  are  discounted  by  interest 
and  mortality  to  their  present  value  and  multi- 
plied by  the  chance  of  surviving  to  pay  the  same, 
precisely  as  in  the  case  of  whole  life  insurances ; 
and  to  get  the  net  annual  premium,  this  net  sin- 
gle premium  is  divided  by  the  present  value  of 
$1.00  per  annum,  payable  for  the  same  term  of 
years,  provided  the  insured  survives. 

A  familiar  and  favourite  form  of  insurance  is 
endowment.    It  consists  of  a  promise  to  pay  the 


56    BUSINESS  OF  LIFE  INSURANCE 

sum  insured  in  event  the  insured  survives  the 
period  or  in  event  he  dies  during  the  period. 
The  latter  portion  of  the  promise  is  plainly  a 
term  insurance.  The  former  is  what  is  known 
as  a  pure  endowment,  viz. :  a  promise  to  pay  a 
sum  of  money  in  event  of  the  survival  of  the 
policyholder  only.  The  net  single  premium  for 
it  is  found  as  follows,  taking  age  10,  the  Ameri- 
can Experience  Table  and  a  term  of  twenty 
years  for  the  purposes  of  the  illustration : 

If  $1,000  were  payable  certainly  at  the  end  of 
twenty  years  it  would  have  a  present  value  of 
$553.68,  interest  being  taken  at  3  per  cent.,  an- 
nually compounded.  But  it  is  to  be  paid  only  in 
case  the  insured,  aged  10,  shall  survive.  The 
table  shows  that  out  of  100,000,  85,441  will  sur- 
vive. Therefore,  it  will  be  necessary  to  pay  only 
85,441  out  of  100,000,  instead  of  the  whole  100,- 
000,  if  so  many  were  insured.  The  chance  of  this 
individual  being  one  of  them,  in  other  words, 
his  chance  of  surviving,  is  .85441,  therefore; 
and,  if  we  multiply  $553.68  by  .85441,  we  shall 
have  the  present  value  of  his  prospect  of  receiv- 
ing the  endowment. 

Add  this  net  single  premium  for  a  pure  en- 
dowment to  the  net  single  premium  for  a  term 
insurance  for  the  same  period,  covering  the 
prospect  that  the  sum  insured  will  be  paid  be- 
cause of  his  death,  and  you  have  the  total  net 
single  premium  for  the  endowment  insurance. 


LIFE  INSURANCE  POLICIES       57 

Divide  this  by  the  present  value  of  $1.00  per  an- 
num for  twenty  years,  payable  each  year  only  in 
case  the  insured  survive,  and  you  have  the  num- 
ber of  dollars  per  year  which  are  equivalent  to 
the  net  single  premium  and  which  will,  there- 
fore, furnish  the  promised  benefits. 

Not  infrequently  the  proceeds  of  a  policy  are 
made  payable  in  instalments,  for  ten,  fifteen 
or  twenty  years.  In  such  case,  the  insurance 
premium  is  taken  for  such  amount  of  insurance 
in  one  sum  as  will  provide  the  instalments.  Thus, 
for  instance,  at  3  per  cent.,  twenty  annual  instal- 
ments of  $50.00  per  year  in  advance  have  a 
present  value  of  $766.19.  Accordingly,  the  com- 
pany charges  for  a  promise  to  pay  the  insurance 
in  these  instalments  the  same  premium  which  it 
would  charge  for  an  insurance  of  $766.19  in  one 
sum. 

Sometimes,  especially  in  recent  years,  the  in- 
surance is  for  instalments  payable  for  the  life 
of  the  beneficiary,  or  for  twenty  years  in  any 
event,  and  for  as  much  longer  as  the  beneficiary 
survives.  The  computation  of  the  premiums  for 
these  benefits  is  a  little  more  complex  and  will 
not  be  described  here;  but  the  principle  is  un- 
altered, viz.:  that  the  premium  is  the  same  as 
would  be  charged  for  a  lump  sum  insurance  of 
equal  value. 

Another  form  of  insurance  is  for  guaranteed 
interest  bonds,  the  sum  insured  not  payable  im- 


58    BUSINESS  OF  LIFE  INSURANCE 

mediately  upon  the  death  of  the  insured  or  upon 
his  survival  (L  e.,  the  feature  applied,  in  the 
case  of  an  endowment,  sometimes  to  the  insur- 
ance only,  sometimes  to  the  pure  endowment 
only  and  sometimes  to  both),  but,  instead,  inter- 
est upon  the  nominal  principal  sum,  payable  for 
a  term  of  years,  such  as  twenty,  and  then  the 
principal  sum  itself  payable.  Sometimes  the 
interest  is  payable  throughout  the  life  of  the 
beneficiary  and  then  the  principal  sum  is  to  be 
paid. 

If  the  interest  is  the  rate  which  the  company 
is  really  willing  to  guarantee  that  it  will  earn 
upon  its  funds,  nowadays  rarely  more  than  3^ 
per  cent,  and  in  many  companies  only  3  per 
cent.,  the  nominal  principal  sum  in  such  policies 
is  the  actual  sum  insured.  But  frequently  the 
guaranteed  rate  of  interest  is  4  per  cent,  or  even 
5  per  cent.,  when  in  point  of  fact  in  all  its  calcu- 
lations the  company  only  counts  upon  realising 
3  per  cent,  or  3^  per  cent.  In  such  case  the  addi- 
tional amounts  to  be  paid  for  interest  are  pro- 
vided for  by  increasing  the  actual  sum  insured 
and  for  which  a  premium  is  charged,  by  the  pres- 
ent value  of  the  extra  instalment  of  ^  per  cent.,  1 
per  cent.,  1^  per  cent.,  or  whatever  it  may  be, 
upon  the  nominal  principal. 

Thus,  suppose  an  endowment  policy  has  been 
issued  for  the  nominal  principal  of  $1,000,  prom- 
ising that  at  the  end  of  twenty  years  or  at  the 


LIFE  INSURANCE  POLICIES        59 

prior  death  of  the  insured,  interest  shall  become 
payable  at  the  end  of  each  year  at  5  per  cent,  for 
twenty  years,  at  the  end  of  which  term  the  prin- 
cipal of  $1,000  shall  be  paid.  And  suppose  that 
the  company  really  expects  to  realise  only  3  per 
cent,  upon  its  funds.  It  must  provide  the  extra 
2  per  cent.,  then,  in  some  other  manner.  This  is 
$20.00  per  year,  payable  at  the  end  of  each 
year,  for  twenty  years  after  the  close  of  the  en- 
dowment period  or  prior  death  of  the  insured; 
and,  taken  by  itself,  is  merely  an  instalment  in- 
surance for  $20.00  per  year  for  twenty  years,  on 
the  twenty-year  endowment  plan.  The  present 
value  of  twenty  instalments  of  $20.00  per  an- 
num at  the  end  of  each  year  at  3  per  cent,  inter- 
est is  twenty  times  $14.8775  or  $297.55.  It  fol- 
lows, therefore,  that  the  company  must  charge  a 
premium  which  will  furnish  a  lump  sum  insur- 
ance of  $1,297.55,  in  order  to  guarantee  these 
benefits.  If  the  *' guaranteed  interest"  feature 
applies  only  to  the  insurance  in  event  of  death, 
it  need  only  charge  this  extra  premium  for  the 
term  insurance  part;  if  to  the  pure  endowment 
feature,  then  only  for  that  part ;  but  if  to  both, 
then  for  both. 

The  actual  returns  upon  the  proceeds  of  the 
policy  will,  of  course,  be  only  3  per  cent. ;  and  it 
is  as  if  the  proceeds,  $1,297.55,  had  been  paid 
over  in  cash  and  the  insured  or  his  beneficiary, 
as  the  case  may  be,  had  then  bought  a  bond,  pay- 


60    BUSINESS  OF  LIFE  INSURANCE 

ing  5  per  cent,  interest,  with  the  proceeds,  pay- 
ing therefore  a  premium  of  $297.55  on  each 
$1,000,  which  reduces  the  net  yield  to  3  per  cent. 
Another  form  of  insurance  which  is  some- 
times somewhat  puzzling  is  known  as  ^'return 
premium"  or  less  frequently  ''guaranteed  mor- 
tuary dividend ' '  insurance.  It  provides  that  in 
event  of  death  during  the  specified  period,  in 
addition  to  paying  the  face  of  the  policy  the 
company  will  also  return  all  or  a  certain  part  of 
the  premiums.  Rates  for  these  benefits  are  made 
by  finding  the  present  value  or  net  single  pre- 
mium for  an  insurance  of  $100  the  first  year, 
$200  the  second  year,  etc.,  throughout  the  term 
and  dividing  these  by  the  corresponding  values 
of  $1.00  per  annum  throughout  the  term,  if  the 
insured  survive.  These  are  the  rates,  then,  for 
an  increasing  insurance  of  $100  per  year  and  the 
rate  for  an  increasing  insurance  for  the  amount 
of  the  desired  premium  return  may  be  computed 
by  a  very  simple  algebraical  artifice.  It  is  then 
added  to  the  regular  premium. 


CHAPTER  Vm 

SURPLUS,  WHENCE  DERIVED  AND  HOW  ASCERTAINED 

The  first  life  insurance  company,  organised 
to  do  a  level  premium  business,  the  Equitable  of 
London,  provided  in  its  deed  of  trust,  as  has 
already  been  stated,  both  for  the  return  of  the 
surplus  if  the  premiums  should  prove  redundant 
and  for  assessment  against  the  insured  if  they 
should  prove  insufficient.  It  was  a  purely  mu- 
tual company.  Fortunately,  the  event  showed 
that  the  mortality  table  employed  exhibited  a 
considerably  higher  death-rate  than  was  actual- 
ly experienced,  and  in  consequence  there  was  a 
surplus  to  divide.  This  was  apportioned  to  the 
policyholders,  not  in  dividends  in  cash  as  had 
originally  been  contemplated,  but  in  *  *  reversion- 
ary bonuses"  or  additions  to  the  sums  payable 
at  death. 

In  order  to  see  from  what  sources  the  surplus 
of  a  life  insurance  company  arises,  it  is  best  to 
cast  a  look  back  over  the  constitution  of  the  pre- 
miums. The  net  premiums,  it  will  be  remem- 
bered, are  so  calculated  that  they  are  accurately 

61 


62    BUSINESS  OF  LIFE  INSURANCE 

sufficient  to  furnish  the  benefits  and  no  more,  in 
case  interest  is  earned  precisely  as  assumed, 
mortality  is  just  as  assumed  and  all  policies  are 
maintained  in  force  until  maturity  as  endow- 
ments or  death.  To  these  net  premiums,  some- 
thing has  been  added  in  loading,  to  cover  ex- 
penses, contingencies  and  perhaps  a  provision  to 
increase  the  surplus. 

It  is  manifest,  first  of  all,  that  if  the  interest 
proves  to  be  at  least  equal  to  the  rate  assumed 
and  the  mortality  not  to  be  higher  than  was  as- 
sumed, no  part  of  the  funds  being  lost  or  wasted, 
there  will  be- no  pressure  upon  the  loading  on  ac- 
count of  contingencies.  In  that  case,  if  the  con- 
tribution of  the  policy  to  expenses  is  less  than 
the  loading — or,  better  put,  if  the  aggregate 
loadings  exceed  the  aggregate  expenses — there 
will  be  a  margin  here  for  surplus. 

Manifestly,  too,  if  there  are  not  so  many 
death-losses,  or,  more  accurately,  so  much  re- 
quired to  pay  the  death-losses,  as  was  assumed, 
there  will  be  a  surplus  there,  also. 

And,  if  the  rate  of  interest  realised  upon  the 
mean  assets  is  higher  than  the  rate  assumed, 
this  in  turn  will  result  in  surplus.  Of  course, 
waste  of  the  assets  will  offset  this,  such  as  losses 
on  investments,  etc. 

If  some  part  or  all  of  the  individual  reserves 
of  members  who  discontinue  is  forfeited,  all  of 
this  at  first  appears  to  be  gain  to  the  other  mem- 


CONCERNING   SURPLUS  63 

bers.  But  both  reasoning  and  experience  show 
that  this  may  easily  prove  to  be  otherwise.  In 
the  first  place,  it  will  at  once  be  seen  to  be  an 
anomaly  that  any  business  should  really  be  the 
gainer  by  losing  custom.  Some  part  of  the  ap- 
parent gain,  also,  may  be  offset  by  the  "adverse 
selection,"  as  it  is  called,  which  is  exercised,  it 
is  thought,  by  those  who  discontinue,  the  healthy 
being  more  disposed  to  discontinue  and  the  fail- 
ing to  continue  at  all  hazards.  But  far  beyond 
this  in  importance  is  the  increased  expenditure 
for  new  business,  which,  experience  shows,  be- 
comes necessary  when  the  public  has  had  ex- 
tended experience  with  a  scheme  in  which  one 
must  persist  or  lose  much  or  all  of  the  benefits 
for  which  he  has  already  paid.  In  all  countries 
the  companies  which  have  established  a  reputa- 
tion for  generous  dealing  with  retiring  policy- 
holders, procure  their  new  business  at  rates  of 
commissions  markedly  lower  than  the  usual 
rates  paid  by  other  companies  in  the  same  field. 
Moreover,  careful  students  of  the  subject  will 
find,  first,  that  these  companies  do  in  point  of 
fact  pay  the  largest  dividends  to  policyholders ; 
second,  that  when  companies  have  become  less 
liberal,  they  have  perforce  increased  commis- 
sions after  a  time,  with  rare  exceptions  and  the 
exceptions  attended  with  declining  business; 
and,  third,  that  when  other  companies  have 
adopted  more  liberal  conditions,  they  have  been 


64    BUSINESS  OF  LIFE  INSURANCE 

able  usually  to  reduce  commissions  without  loss 
of  agency  efficiency. 

The  difference  in  this  regard  is  so  marked  that 
when  the  writer  investigated  the  subject  some 
years  ago,  he  discovered  that  in  two  companies, 
possessing  otherwise  almost  exactly  equal  capa- 
bility for  producing  surplus,  one  forfeiting 
everything  upon  discontinuance  and  the  other 
not  even  forfeiting  the  current  year's  surplus, 
the  two  companies  differing  as  to  their  policies 
also  in  every  other  regard,  the  one  that  had  been 
most  liberal  had  really  earned  and  returned  the 
largest  dividends  at  the  end  of  ten  years  on  the 
same  form  of  policy.  It  appeared,  therefore, 
that  the  policyholders  in  the  other  company  had 
been  at  the  risk  of  forfeiture  of  all  their  re- 
serves and  surplus,  without  any  compensating 
benefit.  The  reason  soon  appeared,  upon  an  ex- 
amination of  the  statistics  of  the  experiences  of 
the  two  companies,  viz.:  Starting  at  not  far 
from  the  same  expense  rate  at  one  time,  the 
company  which  indulged  in  forfeitures  had 
drawn  away  from  the  other  company  until  it 
was  using  very  nearly  10  per  cent,  of  the  pre- 
miums more  for  expenses,  and  this  was  almost 
wholly  due  to  increased  cost  of  new  business. 
Since  then  it  has  adopted  a  different  policy  and 
in  consequence  of  the  liberal  features  has  intro- 
duced lower  commissions  and  materially  re- 
duced its  expense  rate. 


CONCERNING   SURPLUS  65 

It  is  believed  that  a  sufficient  charge  can  be 
made  against  reserves,  in  fixing  surrender 
values,  to  cover  any  possible  **  adverse  selec- 
tion" by  healthy  lives  retiring  and  poorer  lives 
persisting,  without  impairing  the  popularity  of 
the  plans ;  and  even  that  a  very  moderate  addi- 
tional margin  might  also  be  withheld.  But  it  is 
now  certain  that  more  than  this  increases  the 
disposition  to  wait  about  taking  life  insurance 
*' until  I  can  see  my  way  clear  through,"  to  re- 
gard it  a  thing  not  to  be  undertaken  and  dropped 
when  no  longer  required,  without  loss;  and 
therefore  is  more  than  compensated  by  the  in- 
creased expense  necessary  to  induce  men  to  in- 
sure their  lives.  In  addition  to  the  illustration 
referred  to,  very  recent  illustrations  are  fur- 
nished by  the  comparisons  of  dividend  results  in 
the  American  company,  most  famed  for  its  lib- 
erality to  policyholders,  with  the  results  of  divi- 
dends in  leading  companies  which  have  sought 
to  augment  their  earnings  by  forfeitures.  A  com- 
parison of  the  expense  cost  in  these  companies, 
and  especially  of  the  cost  of  new  business,  will 
usually  show  clearly  what  has  offset  the  gains. 
It  seems  to  be  the  operation  of  an  inexorable  law 
of  compensation. 

The  crucial  test  of  the  earnings  of  a  life  insur- 
ance company  is,  of  course,  its  balance  sheet. 
Wlien  it  has  covered  with  good  assets  its  ma- 
tured liabilities  and  provided  the  portion  of  the 


66    BUSINESS  OF  LIFE  INSURANCE 

present  value  of  its  unmatured  obligations,  in 
excess  of  the  present  value  of  future  premiums 
available  to  meet  them,  in  other  words  has  also 
covered  its  reserves,  whatever  remains  is  sur- 
plus. 

If  other  means  of  ascertainment  are  employ- 
ed, such  as  computing  the  gain  from  each  of  the 
foregoing  sources  separately,  it  is  wise  always 
to  put  the  whole  in  the  form  of  a  profit  and  loss 
statement,  starting  with  the  surplus  according 
to  the  balance  sheet  at  the  beginning  of  the  year 
and  exhibiting  at  the  close  the  surplus  according 
to  the  balance  sheet  at  the  end  of  the  year. 

Of  such  a  character  is  the  Gain  and  Loss  Ex- 
hibit, which  a  few  of  the  State  departments,  viz. : 
Wisconsin,  Minnesota  and  South  Dakota,  refus- 
ing to  be  influenced  by  the  objections  of  some  of 
the  companies,  as  other  departments  have  been, 
insist  upon  the  companies  filing  each  year. 
Study  of  it  will  give  a  good  conception  of  the 
nature  of  such  a  profit  and  loss  statement, 
though,  if  the  companies  would  aid  to  perfect  it, 
instead  of  opposing  its  use  in  the  published  re- 
ports, it  could  be  made  more  accurate  and  repre- 
sentative. It  is,  however,  readily  understood 
and  will  repay  examination  on  the  part  of  any- 
body who  wishes  to  understand  the  principle  of 
ascertainment  of  the  sources  of  life  insurance 
surplus. 

In  connection  with  the  apparent  gains  upon 


CONCERNING   SURPLUS  67 

surrender  in  the  exhibit,  it  should  be  borne  in 
mind  that  the  sum  named  is  the  excess  of  the 
reserve  held  against  these  policies  over  the  sur- 
render values  allowed  and  does  not  take  into 
account  adverse  selection  to  be  made  good,  nor, 
what  is  really  much  more  important,  the  fact 
that  for  several  years  after  the  issue  of  a  policy 
in  most  companies,  the  reserve  is  in  excess  of 
what  can  possibly  have  been  accumulated  from 
the  premiums  upon  the  policy,  after  meeting  the 
expense  chargeable  thereto,  including  cost  of 
procurement,  because  the  reserve  is  computed 
by  them  on  the  basis  that  the  loading  for  ex- 
pense is  the  same  each  year,  while  the  actual  ex- 
pense is  much  higher  the  first  year;  and  there- 
fore to  pay  the  full  reserve  would  be  a  loss.  The 
actual  profit  from  this  source  is  not  so  great  as 
it  appears,  not  to  mention  the  offset  of  increased 
expenses. 


CHAPTER  IX 

SURPLUS,  HOW  APPORTIONED  AND  APPLIED 

The  apportionment  of  surplus  among  the  pol- 
icyholders has  always  been  a  matter  concerning 
which  a  variety  of  views  have  been  held.  The 
first  company  to  be  established  on  a  level  pre- 
mium basis  and  which  needed  to  interest  itself 
in  the  matter,  provided  in  its  deed  of  settlement 
for  cash  dividends  which  apparently  should 
have  been  either  percentages  of  the  premiums 
paid,  or,  possibly,  rebates  of  the  overpayment, 
accurately  ascertained  according  to  the  deriva- 
tion of  the  gains.  But  in  practice,  when  it  came 
to  allocate  the  surplus  the  first  time  under  the 
direction  of  the  company's  actuary,  it  declared 
bonuses  as  paid-up  additions  to  the  sum  insured, 
the  same  upon  policies  which  had  been  in  force 
the  same  number  of  years,  without  regard  to  age 
upon  admission  or  other  diiferences. 

A  bonus  system  of  this  general  nature,  i.  e., 
giving  the  profits  in  increased  insurance  either 
by  adding  a  uniform  amount  each  year  or  by 
compounding,  that  is,  adding  a  uniform  percen- 

6S 


APPORTIONMENT  OF  SURPLUS    69 

tage  upon  all  previous  bonus  additions,  as  well 
as  the  original  sum  insured,  has  prevailed  in 
Great  Britain  against  all  suggestions  for  a 
change. 

A  somewhat  similar  system  was  at  first  used 
in  the  United  States,  similar  at  least  to  the  ex- 
tent that  dividends  were  paid  in  bonus  additions. 
In  both  countries,  however,  the  pressure  for 
cash  returns  caused  the  privilege  to  be  granted 
of  cashing  the  bonus  for  its  present  or  net  pre- 
mium value,  as  a  paid-up  insurance. 

In  the  United  States  this  soon  led  to  the  intro- 
duction of  cash  dividends,  and  as  interest  re- 
turns were  heavy,  premiums  good  and  expenses 
and  mortality  low,  the  cash  dividends  ruled  large 
and  consequently  that  plan  became  most  popu- 
lar here. 

Division  of  surplus  in  the  uniform  or  com- 
pound reversionary  bonus  manner  must  mani- 
festly be  undertaken  without  too  close  observa- 
tion of  the  principle  that  the  surplus  arising 
from  the  policyholder's  own  premiums  should 
in  each  case  be  returned.  The  nature  of  the  sys- 
tem requires  that  another  rule  shall  be  followed, 
not  necessarily  to  the  complete  exclusion  of  that 
princij»le,  but  so  far  so  that  attention  to  it  can 
scarcely  be  given  beyond  loading  the  premium 
originally,  so  as  to  make  this  form  of  division  as 
nearly  just  as  possible  under  the  usual  circum- 
stances. 


70    BUSINESS  OF  LIFE  INSURANCE 

In  this  country,  however,  under  the  pressure 
of  the  cash  dividend  plan  or  at  least  of  a  rever- 
sionary bonus  plan  which  called  for  naming  the 
cash  value  of  the  bonus  at  the  time  it  is  declared 
and  offering  the  option  of  an  increased  insur- 
ance or  cash,  attention  was  early  given  to  the 
matter  of  derivation  of  the  surplus  and  its  ap- 
portionment accordingly.  This  developed  what 
came  to  be  known  as  the  "contribution  plan" 
under  which  the  surplus  is  rebated  back  to  the 
insured  precisel}^  as  it  is  considered  that  his  pol- 
icy has  contributed  it.  Thus  if  the  mortality  has 
not  been  so  high  as  was  assumed,  there  is  put 
into  his  dividend  the  proportionate  saving  on  his 
own  tabular  cost  of  insurance.  In  like  manner, 
if  the  expenses  and  contingencies  have  not  ab- 
sorbed all  the  aggregate  loading  on  the  pre- 
miums, there  is  given  him  in  his  dividend  the 
proportionate  part  of  his  loading  that  has  not 
been  required  for  expenses  and  contingencies. 
If  the  average  interest  returns  upon  the  mean 
assets  have  exceeded  the  rate  assumed,  he  re- 
ceives in  his  dividend  interest  at  the  additional 
rate  upon  the  funds  belonging  to  his  policy.  If 
his  own  policy  funds  or  part  of  them  have  been 
subject  to  the  risk  of  forfeiture  upon  discontinu- 
ance or  surrender,  this  interest  return  may  be 
swelled  by  adding  such  gains  to  the  excess  inter- 
est before  computing  the  rate. 

For  many  years  this  plan  seemed  to  give  en- 


APPORTIONMENT  OF  SUEPLUS    71 

tire  satisfaction  to  the  managers  of  companies. 
Its  principles,  as  stated,  were  regarded  incon- 
trovertible, as  indeed  the  fundamental  principle 
of  the  contribution  plan  truly  is.  But  its  method 
of  application  has  more  recently  become  subjec- 
ed  to  very  critical  analysis  and  has  been  found 
not  to  square  with  the  facts.  Thus,  for  instance, 
if  the  loading  is  taken  as  the  same  amount  each 
year,  including  the  first,  it  is  manifest  that  the 
initial  expense  is  not  covered  the  first  year  and 
it  appears  to  be  unfair  to  allow  anything  either 
from  savings  on  mortality  or  from  savings  on 
loading  until  the  excess  of  expenditure  is  made 
good,  even  if  the  profits  on  the  investment  por- 
tion of  the  premium  are  treated  differently,  as 
is  sometimes,  though  not  usually,  the  case. 

The  gains  or  savings  on  the  estimated  cost 
of  insurance,  according  to  the  table,  which  ac- 
crue during  the  earlier  years  of  the  insurance, 
are  due,  of  course,  to  fresh  medical  selection. 
They  are  derived,  therefore,  from  the  premiums 
of  the  newly  insured,  and,  though  they  are  not  to 
go  to  them  exclusively,  but  rather  to  all  alike — 
else  there  would  be  no  advantage  to  the  existing 
members  from  admitting  them — it  is  reasonable 
before  dividing  any  profit  from  this  source  to 
apply  the  gains,  so  far  as  is  required,  to  cover 
the  excess  of  cost  of  procurement  over  the  cur- 
rent loading,  which  cost  was  incurred  in  secur- 
ing the  new  members  who  contribute  the  profit. 


72    BUSINESS  OF  LIFE  INSURANCE 

This  works  no  unfairness  and  renders  the  divis- 
ion of  surplus  much  simpler,  because  the  present 
value  of  these  gains  from  fresh  selection  may  be 
estimated  in  advance  and  be  offset  once  for  all 
against  the  expenses  or,  per  contra,  the  expenses 
be  charged  against  the  profits  from  mortality 
and  loading  combined,  the  remainder  being  cred- 
ited as  a  percentage  of  the  loading. 

Originally  surplus  was  distributed  at  fixed 
intervals,  either  five  or  seven  years.  That  is,  on 
a  certain  day  a  balance  would  be  struck  of  the 
company's  assets  and  liabilities  and  the  resul- 
tant surplus  was  divided  among  the  policyhold- 
ers of  record  upon  that  date,  by  some  means 
which  took  into  account  how  long  each  policy 
had  been  in  force.  This  is  still  the  prevailing 
system  in  Great  Britain.  It  has  the  advantage 
that  the  amount  distributed  may  be  ascertained 
and  be  compared  with  the  surplus  earned  and  in 
hand. 

In  this  country,  likewise,  the  early  form  was 
of  dividends  every  five  years,  but  they  were  de- 
clared as  to  each  policy  at  the  end  of  its  policy 
year  and  not  by  a  division  of  the  profits  to  all  at 
the  same  moment.  This  is  now  the  customary, 
indeed  the  only  method  in  use  in  the  United 
States.  This  period  was  soon  reduced  to  one 
year  in  all  or  nearly  all  of  the  companies.  The 
pressure  for  more  liberal  surrender  privileges 
proving  so  strong  in  the  60 's  and  70 's  that  the 


APPORTIONMENT  OF  SURPLUS    73 

companies  could  not  resist,  except  by  some  ex- 
pedient, long-term  dividend  periods  were  intro- 
duced, with  a  condition  for  utter  forfeiture  upon 
discontinuance  on  the  theory  that  there  were 
enormous  gains  from  these  forfeitures  that  were 
to  accrue  to  the  policyholders  who  survived  and 
persisted.  The  dividend  term  was  usually  made 
twenty  years,  but  sometimes  fifteen  years  or  ten 
years  and  in  a  few  companies  five. 

This  long-term  dividend  system  was  presented 
in  many  modified  forms,  two  companies  actually 
crediting  the  usual  annual  dividends  and  keep- 
ing an  account  with  each  policyholder,  showing 
all  such  credits  and  all  accretions  from  interest 
and  other  gains,  one  company  declaring  the  divi- 
dend provisionally  each  year  and  then  applying 
it  to  buy  a  pure  endowment,  due  at  the  end  of  the 
agreed  upon  period  provided  the  insured  sur- 
vived, but  most  of  the  companies  making  no 
definite  agreement  and  so  not  being  bound  to 
any  particular  mode  of  distribution.  Indeed, 
nearly  all  of  them  employed  a  provision  that  the 
principles  and  methods  used  by  the  company  in 
the  distribution  of  surplus  and  its  determination 
of  the  amount  equitably  due  the  insured  shall  be 
binding  upon  all  parties,  and  do  not  apportion 
surplus  until  the  term  is  on  the  point  of  expir- 
ing. 

In  recent  years,  such  policies  are  not  made 
entirely  forfeitable  upon  discontinuance ;  on  the 


74    BUSINESS  OF  LIFE  INSURANCE 

contrary,  they  have  liberal  surrender  prmleges, 
so  far  as  the  reserves  are  concerned,  but  the  sur- 
plus is  forfeited  upon  discontinuance. 

That  there  was  a  considerable  gain,  if  any 
at  all,  from  the  harsh  forfeiture  conditions,  is 
much  doubted,  in  view  of  the  fact  that  all  the 
estimates  have  failed  to  be  realised.  Reference 
has  already  been  made,  likewise,  to  the  further 
fact  that  in  several  cases  companies,  operating 
under  conditions  otherwise  sunilar,  but  giving 
liberal  dividends  annually  and  granting  liberal 
values  upon  surrender,  have  made  larger  re- 
turns at  the  end  of  ten,  fifteen  or  twenty  years, 
besides  furnishing  meanwhile  an  increasing 
amount  of  insurance  by  means  of  annual  divi- 
dends, applied  as  reversionary  or  paid-up  addi- 
tions to  the  sum  insured,  than  have  other  excel- 
lent companies  upon  policies  calling  for  com- 
plete forfeiture  of  the  accumulated  surplus  upon 
surrender  or  discontinuance.  This  is  explained 
mainly,  as  has  been  shown,  by  the  much  larger 
expense  of  procuring  new  business  which  has 
always  accompanied  the  deferred  dividend 
plans. 

Of  late  years  illustrations  of  results  upon 
actual  policies  have  largely  taken  the  place  of 
the  estimates  which  were  formerly  used.  It 
would  be  difficult  to  suggest  a  more  thoroughly 
proper  method  of  displaying  the  attractions  of  a 
policy.    Yet  the  applicant  should  remember  that 


APPORTIONMENT  OF  SURPLUS    75 

the  figures  are  results  of  past  experience  and 
that  interest  rates  are  now  lower  than  twenty 
years  ago  and  conditions  not  so  favourable  for 
large  surplus  earnings  in  some  other  regards. 
He  should  not  expect  more  than  that  the  results 
twenty  years  from  now  may  be  as  favourable  in 
proportion  to  returns  on  other  investments  as 
the  returns  before  him  in  proportion  to  the  pro- 
fits realised  on  other  investments  in  the  past. 

Most  companies  which  have  not  issued  these 
deferred  dividend  policies  long  enough  to  have 
matured  them,  now  make  use  of  the  actual  re- 
sults of  one  or  more  of  the  other  companies,  a 
practice  at  least  less  liable  to  abuse  than  the  old 
custom  of  making  estimates,  if,  as  has  been  said, 
the  applicant  will  but  bear  in  mind  that  the  fig- 
ures are  not  earnest  that  like  results  will  be 
realised  in  future. 

The  fact  that  in  most  of  the  deferred  dividend 
companies  the  results  of  policies  maturing  in  a 
given  year  have  been  in  almost  every  case  lower 
than  the  results  of  similar  policies,  completing 
their  period  the  previous  year,  should  serve  to 
warn  the  applicants  against  accepting  the  fig- 
ures as  more  than  indications  that  future  re- 
sults, compared  with  future  investment  returns, 
will  be  as  satisfactory  as  past  results  compared 
with  past  investment  returns. 

In  Great  Britain,  owing  to  the  uniform  and 
compound  reversionary  bonus  systems,  the  actu- 


76    BUSINESS  OF  LIFE  INSURANCE 

aries  of  companies  have  for  many  years  aimed, 
by  the  construction  of  the  premiums  and  by  the 
management  following  closely  a  course  previ- 
ously mapped  out,  to  secure  substantial  regular- 
ity and  equality  of  bonuses  from  year  to  year. 
This  followed  a  period  of  great  variations  and 
disappointments,  however.  It  may  be  that  some- 
thing of  the  same  sort  may  be  at  hand  in  Ameri- 
can life  insurance;  and,  indeed,  there  are  com- 
panies whose  dividends  are,  in  their  main  ele- 
ments, pretty  constant,  though  under  our  system 
of  dividing  surplus  according  to  the  contribu- 
tion principle,  the  fact  is  not  so  obvious.  If 
there  could  be  added  to  our  requirements,  made 
by  insurance  departments,  returns  as  to  the 
rates  of  dividends  upon  policies  of  the  same 
kind,  age  and  duration,  with  a  sufficient  number 
of  examples  to  fairly  illustrate  the  average,  as  is 
required  in  Great  Britain,  it  would  tend  to 
strengthen  the  inclination  to  secure  uniform  re- 
sults from  year  to  year  if  possible,  would  pre- 
vent companies  or  their  agents  misleading  ap- 
plicants by  ratios  and  the  like  which  do  not  mean 
what  they  seem  to  say,  and  would  direct  the  com- 
petition of  companies  toward  yielding  the  best 
possible  results  to  policyholders,  in  all  cases.  It 
would  be  a  very  valuable  addition  to  the  returns 
at  present  required  to  be  made.  ' 

The  deferred  dividend  system  introduced  a 
great  variety  of  methods  of  applying  dividends. 


APPORTIONMENT  OF  SURPLUS    77 

Thus,  in  addition  to  the  options  of  taking  them 
in  cash  or  in  paid-up  additions  to  the  sum  in- 
sured, the  privileges  of  appljring  them  to  pur- 
chase an  annuity  for  life  or  for  a  term  of  years 
depending  upon  survival  are  the  commonest 
forms.  At  the  end  of  the  dividend  period  there 
are  usually  added  to  these  options  the  privilege 
of  surrender  of  the  policy  for  its  full  reserve 
value,  in  addition  to  the  surplus,  which  may  be 
drawn  in  cash  or  be  applied  in  like  manner  as 
the  surplus.  These  options  have  unquestionably 
added  much  to  the  attractiveness  of  the  deferred 
dividend  plans. 

A  feature  of  this  plan  which  is  occasionally 
found  is  that  the  guaranteed  reserve  at  the  end 
of  the  period  is  a  larger  amount  than  the  usual 
reserve  for  such  a  policy  by  the  standards  in  use 
by  the  company.  Sometimes  it  is  said  that  this 
is  guaranteein,2:  more  than  the  legal  reserve,  but 
this  cannot  be  true,  for  when  such  a  guaranty  is 
given  the  department  charges  the  company  with 
a  reserve  large  enough  to  cover  it  also.  It  is 
attractive  to  have  the  larger  guaranty  when 
dividends  are  deemed  so  unreliable;  but,  of 
course,  if  paid-up  insurance  is  taken,  the  insured 
must  leave  with  the  company  this  larger  reserve. 
The  policy  was  designed  both  to  attract  by  the 
larger  guaranty  and  also  to  cover  the  extra  mor- 
tality caused  by  adverse  selection — those  who 
are  in  good  health  taking  cash  or  other  settle- 


78    BUSINESS  OF  LIFE  INSURANCE 

ments  and  those  who  are  in  poor  health  continu- 
ing the  insurance — which  is  experienced  as  to 
the  lives  that  continue  their  insurance. 

It  is  but  fair  to  say  that  disappointment  at 
the  shrinking  of  annual  dividends  was  a  potent 
factor  in  rendering  deferred  dividends  popular. 
Nowadays,  in  companies  which  issue  many  an- 
nual dividend  policies,  the  dividends  are  pretty 
stable;  and  a  similar  stability,  it  is  thought,  is 
being  attained  in  deferred  dividends.  It  should 
also  be  remembered  that,  though  subject  to  criti- 
cism for  disappointing  results  as  compared  with 
estimates,  partly,  though  not  wholly,  due  to  the 
declining  rates  of  interest,  the  American  com- 
panies have  on  the  whole  paid  larger  dividends 
than  the  companies  of  other  countries. 

One  company  has  tried  the  experiment  of  per- 
mitting policyholders  to  choose  whether  divi- 
dends are  to  be  deferred  or  paid  annually,  upon 
the  completion  of  the  second  year.  So  few  have 
selected  deferred  that  it  is  reported  that  the  ex- 
periment is  to  be  abandoned. 

Life  insurance  can  be  purchased  from  nearly 
all  the  companies  on  the  non-participating  plan 
and  at  very  attractive  rates,  amounting  to  a  very 
large  dividend  off  the  participating  rates,  guar- 
anteed from  the  outset.  These  rates  are,  how- 
ever, for  purposes  of  meeting  competition  main- 
ly, and  the  sale  is  usually  discouraged,  especial- 
ly when  a  very  low  ra' :  is  made,  by  paying  a 


APPORTIONMENT  OF  SURPLUS    79 

much  lower  commission  than  upon  participating 
policies  and  also  by  being  unusually  rigid  in 
medical  selection.  Notwithstanding  which  lat- 
ter, non-participating  policies  practically  always 
exhibit  a  less  favourable  mortality  than  partici- 
pating, showing  that  applicants  who  are  in 
search  of  the  most  protection  for  their  monej^ 
often  know  more  about  their  prospects  of  life 
than  the  physicians  can  discover. 

A  very  few  companies  have  tried  selling  non- 
participating  life  insurance  exclusively,  but  all 
of  them  have  had  poor  success  except  when 
they  also  conduct  some  other  branch  of  business, 
such  as  industrial  life  insurance,  i.  e.,  insuring 
all  the  members  of  the  family  for  small  weekly 
premiums  collected  at  their  homes,  or  as  a  gen- 
eral casualty  insurance  business. 


CHAPTER  X 


POLICY   CONDITIONS 


Originally  the  policies  of  American  compa- 
nies contained  many  conditions. 

In  the  first  place,  the  validity  of  the  contract, 
no  matter  how  long  it  had  been  kept  in  force,  de- 
pended entirely  upon  the  exact  truth  of  all  the 
statements  in  the  application,  including  the  ap- 
plicant's statements  to  the  medical  examiner. 
These  were  made  warranties,  a  consideration 
for  the  policy  and  by  reference  a  part  of  the  con- 
tract itself.  The  effect  of  this  is  that  the  con- 
tract stands  or  falls  with  the  truth  or  falsity  of 
all  the  statements. 

To  see  what  significance  this  really  has  one 
must  know  what  would  be  the  status,  were  the 
statements  received  as  representations  merely. 
In  that  case,  in  order  to  avoid  liability  under  the 
policy,  the  company  would  need  to  prove : 

First — That  the  statement  was  material,  i.  e., 
that,  had  the  truth  been  told,  the  risk  would  not 
have  been  assumed,  or,  more  rarely,  the  death 
could  not  have  occurred. 

80 


POLICY   CONDITIONS  81 

Second — That  the  statement  was  false. 

Third — That  the  statement  was  known  to  the 
applicant  to  be  false  or  that  he  had  every  oppor- 
tunity to  know  whether  it  was  true  or  false,  in 
which  event  a  duty  devolves  upon  him  to  ascer- 
tain the  fact  before  making  the  statement. 

"WHien  a  statement  is  a  warranty  the  company 
need  only  prove  that  it  is  untrue.  It  matters  not 
that  it  was  not  material  or  that  it  had  nothing  to 
do  with  causing  the  death ;  it  matters  not  that  he 
supposed  it  to  be  true,  with  good  reason,  and 
had  no  opportunity  to  learn  that  it  was  not  true. 

In  some  States  the  courts  have  relaxed  the 
legal  maxims  as  to  warranty ;  in  some  others  the 
Legislatures  have  done  it  for  them.  But  in  most 
States  they  are  still  in  force  without  material 
modification. 

Nearly  all  companies  still  accept  the  state- 
ments made  in  the  application  as  warranties, 
and  accordingly,  as  is  required  by  the  laws  of 
several  States,  attach  a  copy  of  the  insured's 
statements  to  the  policy;  but,  practically  with- 
out exception,  they  cancel  this  defence  after  one, 
two  or  three  years,  by  providing  that  the  policy 
shall  then  be  incontestable.  Sometimes,  though 
rarely,  the  exception  is  made  **  except  in  the  case 
of  actual  fraud,"  which,  so  far  as  it  applies  to 
the  insured 's  statements,  makes  them  after  that 
period  representations  merely. 

At  first  policies  were  filled  with  restrictions 


82    BUSINESS  OF  LIFE  INSURANCE 

upon  residence  and  travel,  occupation  and  mode 
of  death.  These  are  nowadays  reduced  to  re- 
strictions for  a  short  time  only — from  one  to 
three  years,  in  different  companies — against 
residence  or  travel  in  the  Tropic  or  Frigid 
Zones,  against  a  few  very  dangerous  occupa- 
tions and  against  suicide  and  death  by  duelling 
or  in  consequence  of  a  violation  of  law.  Some 
companies  make  their  policies  free  from  restric- 
tions from  the  outset. 

The  policies  of  nearly  all  companies  are  now 
by  their  terms  incontestable  after  from  one  to 
three  years  if  premiums  have  been  duly  paid. 
The  occasional  exception,  "except  in  case  of 
actual  fraud,"  has  already  been  noticed.  This 
exception  is  proper  certainly  and  its  presence 
indicates  good  faith.  In  point  of  fact,  in  cases 
of  obvious  fraud  claims  have  been  contested, 
notwithstanding  the  incontestable  provision, 
and  some  courts  have  upheld  the  right  to  contest 
on  the  broad  ground  that  it  is  against  public  pol- 
icy to  uphold  fraud.  Contests  are  extremely 
rare,  however,  and  life  insurance  companies 
have  in  the  last  quarter  century  changed  from 
frequent  litigants  into  most  infrequent  litigants. 

There  is  little  to  be  desired  in  the  modern  life 
insurance  policy  in  the  matter  of  absence  of 
annoying  restrictions  or  onerous  conditions. 
The  only  improvement,  if  it  would  be  an  im- 
provement, that  could  be  suggested,  is  the  total 


POLICY   CONDITIONS  83 

abolishment  of  the  treatment  of  statements  of 
the  applicant  as  warranties ;  and  lawyers  say,  as 
to  this,  that  under  the  rules  of  evidence  enforced 
in  some  States,  they  cannot  get  these  statements 
admitted  even  as  representations,  if  not  made  a 
part  of  the  contract,  unless  made  before  a  notary 
and  duly  acknowledged. 

The  British  company  earliest  established  to 
do  a  level  premium  life  insurance  business  very 
soon  began  to  purchase  the  policies  of  members 
who  wished  to  surrender,  allowing  liberal  values 
for  them.  When  it  had  declared  bonuses  in 
addition  to  the  sum  insured,  it  soon  set  up  the 
rule  to  allow  the  surrender  of  these  bonus  addi- 
tions at  any  time  for  their  full  reserve  values, 
and  now  for  many  years  it  has  allowed  the  with- 
drawal of  the  full  reserve  value  of  the  insurance 
and  all  vested  bonuses  upon  surrender  of  the 
policy,  at  the  end  of  any  year,  including  the  first. 

The  policies  of  the  British  companies,  how- 
ever, have  not  contained  guarantees  of  surren- 
der values  for  specified  amounts,  except  in  rare 
instances.  Some  companies  have  dealt  very  lib- 
erally with  retiring  policyholders  and  others 
quite  the  contrary,  neither  of  these  classes  being 
compelled  to  do  so  either  by  contract  or  by  stat- 
ute. The  purchaser  of  life  insurance  there  pro- 
tects himself  by  buying  of  a  company  with  a 
reputation  for  generous  treatment  upon  sur- 
render. 


84    BUSINESS  OF  LIFE  INSURANCE 

In  the  early  days  of  life  insurance  in  the 
United  States  no  values  whatever  were  allowed 
upon  surrender.  The  public  was  familiar  with 
the  idea  that  when  fire  insurance  expires  and  is 
not  renewed  by  the  payment  of  the  premium 
there  is  no  value  there.  The  nature  of  the  level 
premium  life  contract  was  not  at  first  appre- 
hended nor  that  it  of  necessity  called  for  invest- 
ment. This  subject  was  considered  by  the  Su- 
preme Court  of  the  United  States,  in  1876,  the . 
court  deciding  as  follows : 

"We  agree  with  the  court  below,  that  the  con- 
tract is  not  an  assurance  for  a  single  year,  with 
a  privilege  of  renewal  from  year  to  year  by  pay- 
ing the  annual  premium,  but  that  it  is  an  entire 
contract  of  assurance  for  life,  subject  to  discon- 
tinuance and  forfeiture  for  non-payment  of  any 
of  the  stipulated  premiums.  Such  is  the  form  of 
the  contract,  and  such  is  its  character.  It  has 
been  contended  that  the  pajTnent  of  each  pre- 
mium is  the  consideration  for  insurance  during 
the  next  following  year,  as  in  fire  policies.  But 
the  position  is  untenable.  It  often  happens  that 
the  assured  pays  the  entire  premium  in  advance, 
or  in  five,  ten  or  twenty  annual  instalments. 
Such  instalments  are  clearly  not  intended  as  the 
consideration  for  the  respective  years  in  which 
they  are  paid;  for,  after  they  are  all  paid,  the 
policy  stands  good  for  the  balance  of  the  life  in- 
sured, without  any  further  payment.    Each  in- 


POLICY   CONDITIONS  85 

stalment  is,  in  fact,  part  consideration  of  the  en- 
tire insurance  for  life.  It  is  the  same  thing 
where  the  annual  premiums  are  spread  over  the 
whole  life.  The  value  of  assurance  for  one  year 
of  a  man's  life  when  he  is  young,  strong  and 
healthy  is  manifestly  not  the  same  as  when  he  is 
old  and  decrepit.  There  is  no  proper  relation 
between  the  annual  premium  and  the  risk  of  as- 
surance for  the  year  in  which  it  is  paid.  This 
idea  of  assurance  from  year  to  year  is  the  sug- 
gestion of  ingenious  counsel.  The  annual  pre- 
miums are  an  annuity,  the  present  value  of 
which  is  calculated  to  correspond  with  the  pres- 
ent value  of  the  amount  assured,  a  reasonable 
percentage  being  added  to  the  'premiums  to 
cover  expenses  and  contingencies.  The  whole 
premiums  are  balanced  against  the  whole  insur- 
ance." 

The  contrary  view  is  given  in  a  minority  opin- 
ion filed  at  the  same  time : 

*'I  cannot  construe  the  policies  as  the  major- 
ity have  construed  them.  A  policy  of  life  insur- 
ance is  a  peculiar  contract.  Its  obligations  are 
unilateral.  It  contains  no  undertaking  of  the 
assured  to  pay  premiums;  it  merely  gives  him 
an  option  to  pay  or  not,  and  thus  to  continue  the 
obligation  of  the  insurers,  or  terminate  it  at  his 
pleasure.  It  follows  that  the  consideration  for 
the  assumption  of  the  insurers  can  in  no  sense 
be  considered  an  annuity  consisting  of  the  an- 


86    BUSINESS  OF  LIFE  INSURANCE 

nual  premiums.  In  my  opinion,  the  true  mean- 
ing of  the  contract  is,  that  the  applicant  for  in- 
surance, by  paying  the  first  premium,  obtains  an 
insurance  for  one  year,  together  with  a  right  to 
have  the  insurance  continued  from  year  to  year 
during  his  life,  upon  payment  of  the  same  an- 
nual premium,  if  paid  in  advance." 

These  decisions  came  later,  however,  than  the 
earliest  of  the  surrender  value  agitation,  which 
began  before  1860,  as  a  result  of  forfeiture 
even  of  vested  paid-up  additions  to  the  sum 
insured. 

The  idea  that  this  treatment  was  unfair  first 
got  abroad  through  the  manifest  injustice  of  for- 
feiting these  paid-up  additions.  From  this  the 
whole  subject  came  up  for  discussion. 

Elizur  Wright  was  at  about  this  time  appoint- 
ed a  commissioner  of  insurance  for  Massachu- 
setts. He  was  already  an  old  man ;  but,  because 
he  was  skilled  in  mathematics  and  was  by  nature 
and  training  a  reformer,  he  was  well  fitted  to 
carry  forward  a  movement  for  juster  conditions. 

His  agitation  of  the  matter  in  his  annual  re- 
port resulted  in  action  by  the  Legislature  of 
Massachusetts,  requiring  companies  of  that 
State  to  continue  the  insurance  upon  surrender, 
for  such  time  as  80  per  cent,  of  the  reserve  would 
pay  for  at  the  net  single  premium  for  temporary 
insurance  by  the  actuaries'  table  and  4  per  cent. 
interest. 


POLICY   CONDITIONS  87 

Later  this  was  made  automatic,  unless  the  in- 
sured accepted,  instead,  paid-up  insurance  or  a 
cash  value.  Yet  later,  under  Mr.  Wright's  ad- 
vice, it  was  made  compulsory  to  allow  as  a  cash 
surrender  value  the  full  reserve,  less  a  surren- 
der charge  fixed  by  a  method  devised  by  himself. 
Compulsory  cash  surrender  values  are  still  re- 
quired by  the  laws  of  Massachusetts  to  be  given 
by  companies  of  that  State,  although  the  system 
of  surrender  charges  has  been  modified. 

Several  other  States,  notably  New  York,  fol- 
lowed witli  laws  requiring  the  allowance  of  sur- 
render values  in  extended  or  paid-up  insurance, 
either  upon  application  within  six  months  after 
discontinuance  or  automatically,  the  laws  in 
some  cases  appl}ang  to  companies  of  the  domi- 
cile only  and  in  others  to  all  companies  doing 
business  within  the  State. 

Even  before  Elizur  "Wright  secured  the  enact- 
ment of  the  first  surrender  value  law  two  com- 
panies of  other  States  introduced  the  feature  of 
surrender  values  in  paid-up  insurance  into  their 
policies  voluntarily.  It  will  be  observed,  there- 
fore, that  in  consequence  of  their  own  want  of 
liberality  theretofore,  and  of  the  pressure  of  law 
and  of  competition,  American  life  insurance 
companies  have  necessarily  made  surrender 
values  a  matter  of  contract.  An  opposite  course 
was,  however,  for  a  long  time  pursued  as  to  sur- 
render values  in  cash  and  as  to  cash  loans,  but  at 


88    BUSINESS  OF  LIFE  INSURANCE 

last  competition  compelled  these,  too,  to  be  guar- 
anteed in  the  contracts. 

Several  companies  were  willing  to  grant  cash 
loans  upon  their  policies  long  before  they  were 
willing  to  grant  any  form  of  surrender  value. 
Loans  to  pay  premiums  in  part  were  very  early 
a  feature  of  the  business  in  America ;  the  ' '  loan 
note"  plan,  under  which  the  insured  paid  part 
of  his  premium  in  cash,  the  remainder  being 
charged  against  his  policy  and  expected  to  be 
paid  off  by  dividends,  was  one  of  the  first  plans 
to  become  popular.  Its  eventual  disappearance 
was  not  due  to  anything  unfair  or  unsafe  in  the 
plan,  but  to  the  two  circumstances  that  the  com- 
panies charged  too  high  a  rate  of  interest  upon 
these  loans  and  that  the  estimated  annual  divi- 
dends were  not  realised.  But  the  same  com- 
panies that  would  lend  one  policyholder  30  per 
cent.,  40  per  cent,  or  even  50  per  cent,  of  his  an- 
nual premium  on  this  plan  would  neither  lend 
him  10  per  cent,  nor  indeed  anything  if  he  paid 
in  the  full  premium  in  cash,  nor  allow  him  any- 
thing whatever  upon  surrender.  Such  anoma- 
lies as  this  have  now  long  ago  disappeared. 

On  the  other  hand,  at  least  one  of  the  Massa- 
chusetts companies,  though  compelled  to  allow 
cash  values  upon  surrender  according  to  law, 
refused  to  grant  cash  loans,  even  so  late  as  1893, 
in  which  year  it  lost  more  business  than  most 
other  companies,  because  it  thus  encouraged 


POLICY   CONDITIONS  89 

surrender,  instead  of  permitting  the  insured  to 
have  a  cash  loan  and  to  continue  his  insurance. 

In  1892,  as  a  result  of  the  change  of  manage- 
ment of  one  of  the  largest  companies,  great  im- 
petus was  given  to  the  movement  for  voluntary 
granting  of  liberal  surrender  and  loan  features 
by  the  introduction  of  such  conditions  into  its 
policies.  The  failure  of  the  deferred  dividend 
plans,  with  forfeiture  of  all  premiums  upon  dis- 
continuance before  the  completion  of  the  period, 
to  yield  the  large  returns  expected,  undoubtedly 
disposed  the  public  to  demand  these  privileges 
and  to  prefer  in  purchasing  life  insurance  com- 
panies which  offered  them.  In  consequence  now 
nearly  all  the  companies  are  liberal  enough  in 
these  regards,  though  the  applicants  will  do  well 
to  compare  policies  carefully  before  purchasing. 

Under  policies  on  the  deferred  plans  the  divi- 
dends are  still  forfeited  to  the  surviving  and 
persisting  members  upon  death  or  discontinu- 
ance. But,  on  the  other  hand,  the  guaranteed 
surrender  values  frequently  represent  a  larger 
percentage  of  the  reserve  than  is  allowed  when 
dividends  are  annual.  The  forfeiture  of  the  sur- 
plus, in  such  cases,  is  a  substitute  for  a  surren- 
der charge.  As  such  it  may  not  be  very  excessive 
unless  surrender  is  made  in  the  later  years  of 
the  term. 

Various  surrender  privileges  have  been  called 
* '  non-forfeiture ' '  by  different  companies.  Thus, 


90    BUSINESS  OF  LIFE  INSURANCE 

the  allowance  of  surrender  values  in  paid-up  in- 
surance for  a  fractional  amount  or,  perhaps,  in 
extended  insurance  for  the  whole  amount,  if  ap- 
plied for  within  six  months  after  discontinuance, 
has  been  called  non-forfeiture.  Yet  more  com- 
monly has  it  been  applied  to  the  automatic  ex- 
tension of  the  insurance  for  the  whole  amount 
for  a  limited  term.  In  a  sense,  perhaps,  each  of 
these  is  non-forfeiture,  for  the  whole  value  of 
the  policy  is  not,  as  once  was  the  case,  definitely 
and  finally  forfeited  upon  discontinuance.  But 
the  original  policy  contract  is  forfeited  and  a 
new  one  set  up  in  its  stead. 

Non-forfeiture  was  the  name  first  applied  to  a 
system  which  reached  this  country  rather  late 
and  has  not  yet  been  generally  accepted  and  put 
into  practice,  though  some  companies  provide 
for  it  in  their  policies.  Its  late  appearance  here 
may  be  explained  by  the  unwillingness  of  our 
companies  to  grant  cash  loans.  In  Australia, 
where  the  plan  originated,  it  has  been  in  use  for 
half  a  century.  It  consists  in  applying  all  ac- 
crued surplus  to  pay  the  premium,  whenever 
due  and  unpaid,  and  charging  the  remainder 
against  the  policy  as  a  loan.  This  is  continued 
until  the  entire  fund  is  exhausted  in  maintaining 
the  policy  in  force  for  the  original  amount,  on 
the  original  plan,  with  full  participation  and 
with  the  right  at  any  time  before  the  policy 
lapses  finally,  to  resume  premium  payment, 


POLICY   CONDITIONS  91' 

without  medical  re-examination,  either  paying 
oif  the  accrued  indebtedness  or  permitting  it  to 
stand  and  paying  interest  upon  it. 

A  grace  of  one  month  in  the  payment  of  pre- 
miums has  been  given  by  some  companies  for 
many  years  and  is  now  found  in  the  policies  of 
nearly  every  company. 


CHAPTER  XI 

BENEFICIARIES — INSURABLE  INTEREST 

Life  insurance  policies  were  originally  drawn 
up  as  contracts  between  the  company  and  the 
beneficiary.  Both  in  Great  Britain  and  in  this 
country  the  special  statutes  giving  married 
women  during  coverture  the  right  to  have  the 
proceeds  of  policies  upon  the  lives  of  their  hus- 
bands paid  to  their  separate  estates,  ran  that 
they  might  effect  insurance  upon  the  lives  of 
their  husbands.  The  life  insured  was  the  sub- 
ject of  the  insurance,  but  the  insured  was  not 
really  a  party  to  the  contract. 

This  view  of  the  matter  made  it  doubtful 
whether  a  warranty  by  the  insured  was  binding, 
so  as  to  avoid  the  contract  in  event  it  proved 
false.  This  difficulty  was  overcome  by  having 
the  beneficiary  sign  and  warrant  the  statements, 
as  well  as  the  insured ;  and  this  in  turn  was  re- 
laxed into  accepting  the  signature  by  the  hus- 
band or  father,  when  applying  for  life  insur- 
ance, of  the  name  of  his  wife  or  child,  as  well  as 
his  own,  the  theory  being  that  if  the  warranty 
was  not  good,  the  contract  itself  was  also  not 

92 


INSURABLE   INTEREST  93 

good,  being  based  upon  precisely  the  same  signa- 
tures. 

In  Great  Britain  at  an  early  date  the  evils  of 
speculation  in  insurance  upon  the  lives  of  others 
caused  the  enactment  of  "The  Gambling  Act,'* 
which  forbade  insurances  being  effected  upon 
the  lives  of  others,  unless  the  beneficiary  pos- 
sessed an  interest  in  the  life  insured.  Tliis  law, 
however,  did  not  prevent  one  insuring  his  own 
life  in  favour  of  his  estate  and  assigning  it  for 
value  to  whomsoever  he  desired. 

In  the  United  States  there  are  few  laws  con- 
cerning insurable  interest,  but  our  judges  have 
generally  derived  rules  to  govern  it  from  max- 
ims of  the  common  law  and  from  consideration 
of  the  fact  that  insurance  is  indemnity.  It  is 
worthy  of  observation  at  this  point  that  this 
view  was  taken  for  some  years  in  Great  Britain, 
but  that  the  highest  court  there  has  now  decided 
that  life  insurance  is  not  a  contract  of  indemnity. 

In  Great  Britain  a  life  insurance  policy  trans- 
ferred for  value,  however  much  less  than  it  is 
worth,  is  good  in  the  hands  of  its  owner.  The 
courts  of  New  York  and  some  other  States  have 
decided  the  same  way;  but  the  Federal  courts, 
followed  by  the  courts  of  most  of  the  States, 
have  carried  the  theories  of  indemnity  and  in- 
surable interest  so  far  that  they  will  not  admit 
that  a  transfer  for  value  is  good  beyond  the 
amount  of  that  value  and  interest  thereon,  on 


94    BUSINESS  OF  LIFE  INSURANCE 

the  theory  that  to  allow  more  is  to  permit  insur- 
ance beyond  the  insurable  interest  and  gambling 
upon  lives.  Accordingly,  these  courts  hold  that 
the  holders  of  policies,  transferred  for  value, 
have  only  a  right  to  a  part  of  the  proceeds  suffi- 
cient to  cover  the  value  paid  and  that  the  origi- 
nal beneficiaries,  as,  for  instance,  the  insured's 
estate,  have  the  right  to  the  remainder. 

This  view  finds  a  justification  in  the  fact  that 
where  the  contrary  view  prevails,  policies  are 
frequently  made  the  subject  of  sale  to  specula- 
tors and  are  also  often  taken  with  the  intention 
to  make  an  assignment  for  nominal  value  in  or- 
der to  defeat  the  Gambling  Act  or  insurable  in- 
terest rules  of  law. 

The  fact  that  the  legal  status  of  the  life  insur- 
ance policy  as  a  contract  between  the  company 
and  the  beneficiary  did  not  represent  the  actual 
relations  of  the  parties  soon  developed  in  statu- 
tory provisions  that  the  amount  of  insurance  in 
favour  of  a  wife,  but  paid  for  by  the  husband, 
which  should  be  exempt  from  seizure  for  the 
benefit  of  his  creditors,  should  be  limited.  Life 
insurance  which  was  at  the  outset  taken  mainly 
in  business  transactions  and  to  secure  debts,  has 
come  more  and  more  to  be  taken  and  paid  for  by 
the  person  whose  life  is  insured,  for  the  protec- 
tion of  designated  beneficiaries  or  of  his  estate. 

In  order  to  give  the  insured  a  certain  measure 
of  control  over  the  policy,  though  payable  to  a 


INSURABLE   INTEREST  95 

designated  beneficiary,  policies  have  frequently 
provided  that  dividends  and  the  endowment  or 
other  cash  value  should  be  payable  to  the  in- 
sured, and  even  that  he  should,  without  the  con- 
sent of  the  beneficiary,  have  the  right  to  borrow 
against  the  policy  or  to  surrender  it  at  any  time. 
These  adverse  interests,  of  course,  render  the 
policy,  in  part  or  wholly,  free  from  the  exemp- 
tion from  seizure  for  the  insured's  debts  during 
his  lifetime,  which  applies  when  it  is  the  sepa- 
rate property  of  the  beneficiary  without  qualifi- 
cation. 

In  recent  years,  policies  have  most  frequently 
been  issued,  payable  to  a  designated  beneficiary, 
but  with  a  reservation  to  the  insured  of  power 
to  change  the  beneficiary.  This  is  equivalent  to 
what  is  well  known  in  law  as  ''a  general  power 
of  appointment"  which  has  been  uniformly  held 
to  leave  the  property  in  the  person  who  pos- 
sesses the  power,  because  he  can  take  the  title  at 
will  by  appointing  himself.  It  seems  clear, 
therefore,  that  during 'the  insured's  lifetime  at 
least  the  policy  is  liable  for  his  debts.  Whether 
it  would  be  in  case  he  dies,  title  remaining  in  a 
specified  beneficiary  and  the  right  to  name  him- 
self not  having  been  exercised  by  the  insured 
during  his  lifetime,  is  not  so  certain;  but  there 
is  at  least  a  strong  probability  that  it  would.  It 
would  be  well  if  the  status  were  definitely  deter- 
mined by  statute,  as  it  is  in  some  of  the  laws 


96    BUSINESS  OF  LIFE  INSURANCE 

relating  to  fraternal  beneficiary  associations 
which  definitely  protect  the  life  insurance 
against  seizure  for  the  debts  of  the  insured, 
while  at  the  same  time  giving  him  the  power  to 
change  the  beneficiary. 

There  is  at  bottom  good  reason  why  the  courts 
ought  to  relax  their  rigid  decisions  as  to  what 
constitutes  insurable  interest.  Their  purpose  is 
to  prevent  one  being  advantaged  by  an  insur- 
ance on  the  life  of  another  when  he  has  not  an 
equal  interest  in  the  survival  of  that  life.  But, 
when  a  man  purchases  insurance  on  his  own  life 
for  which  he  and  not  the  beneficiary  is  to  pay, 
and  names  a  beneficiary,  not  for  value,  he  there- 
by expresses  his  opinion  that  this  person  is  re- 
garded by  him  to  have  such  claims  upon  him  as 
justify  the  protection.  Unless  not  in  possession 
of  his  faculties,  he  is  in  point  of  fact  the  best 
judge  as  to  who  would  benefit  by  his  survival 
and  suffer  by  his  decease,  and  it  is  to  be  hoped 
that  this  may  one  day  be  recognised. 

It  has  been  recognised  from  the  beginning  in 
Australia,  where  laws  concerning  insurable  in- 
terest are  wholly  wanting  and  a  man  may  name 
any  beneficiary  he  chooses.  The  results  have 
been  uniformly  good.  The  manager  of  the 
largest  company  there  says  that  there  have  been 
next  to  no  abuses  and  that  this  freedom  is  gen- 
erally satisfactory. 

The  following  from  Prof.  LandelPs  "Sum- 


INSURABLE   INTEREST  97 

mary  of  the  Law  of  Contracts,"  the  highest 
authority  upon  the  subject,  indicates  that  there 
may  be  special  peril  when  the  beneficiary  named 
by  the  insured,  under  his  reserved  ''general 
power  of  appointment,"  is  not  a  relative: 

**It  was  decided  in  Button  vs.  Poole  (1677) 
that  a  daughter  might  maintain  an  action  on  a 
promise  made  to  her  father  for  her  benefit, 
though  it  had  previously  been  decided,  as  it  has 
been  since  (and  uniformly  in  England),  that  a 
person  for  whose  benefit  a  promise  was  made,  if 
not  related  to  the  promisee,  could  not  sue  upon 
the  promise.  This  latter  proposition  is  so  plain 
upon  its  face  that  it  is  difficult  to  make  it  plainer 
by  argument.  A  binding  promise  vests  in  the 
promisee,  and  in  him  alone,  a  right  to  compel 
performance  of  the  promise,  and  it  is  by  virtue 
of  his  right  that  an  action  is  maintained  upon 
the  promise.  In  the  case  of  a  promise  made  to 
one  person  for  the  benefit  of  another,  there  is  no 
doubt  that  the  promisee  can  maintain  an  action, 
not  only  in  his  own  name,  but  for  his  own  benefit. 
If,  therefore,  the  person  for  whose  benefit  the 
promise  was  made  could  also  sue  on  it,  the  con- 
sequence would  be  that  the  promisor  would  be 
liable  to  two  actions.  In  truth,  a  binding  prom- 
ise to  A  to  pay  $100  to  B  confers  no  right  upon 
B  in  law  or  equity.  It  confers  an  authority  upon 
the  promisor  to  pay  the  money  to  B,  but  that 
authority  may  be  revoked  by  A  at  any  moment.** 


CHAPTER  Xn 

CONVERTIBILITY 

One  feature  which  has  been  slowly  developing 
in  the  policies  issued  by  American  life  insurance 
companies  is  convertibility.  The  development  is 
as  yet  by  no  means  complete. 

It  commenced  in  the  matter  of  surrender 
values,  and  nowadays,  as  has  been  shown,  a  pol- 
icy is  usually  convertible  upon  surrender  into 

1.  Cash. 

2.  Paid-up  Insurance. 

3.  Extended  Insurance. 

And  at  the  end  of  specified  periods,  also  into 

4.  A  Life  Annuity. 

5.  A  Temporary  Life  Annuity. 

The  benefit  or  principal  sum  insured  may,  ac- 
cording to  the  terms  of  the  policies  of  many 
companies,  be  converted  into 

1.  Instalments  payable  for  a  definite  term. 

2.  Instalments  payable  for  the  life  of  the  bene- 
ficiary. 

3.  Instalments  payable  for  a  definite  term  and 
so  much  longer  as  the  beneficiary  may  survive. 

9S 


CONVERTIBILITY  99 

^Tien  the  policy  is  written,  payable  in  instal- 
ments, it  may  nsually  be  converted  into  a  policy 
for  the  commuted  value  of  the  instalments,  pay- 
able in  one  sum. 

The  provisions  for  instalment  payment  should 
be  scanned  carefully  if  the  intention  is  to  pre- 
vent the  beneficiary  reconverting  the  benefit  into 
a  lump  sum  by  surrendering  the  instalments  for 
their  commuted  value.  The  company  is  usually 
under  no  obligations  to  do  this,  however;  and  if 
it  acts  in  good  faith,  will  not  do  it  and  thus  de- 
feat the  purpose  of  the  deceased  policyholder. 
But  unless  the  fund  is  impressed  with  a  trust, 
which  is  not  true  in  most  cases,  the  company  and 
the  beneficiary  are  free  to  deal  as  they  will  with 
one  another. 

The  instalments  are  the  equivalent  of  the 
lump  sum  benefit  which  the  premium  would  pay 
for,  on  the  basis  of  3  per  cent,  or  3|  per  cent,  in- 
terest, as  the  case  may  be.  Until  about  1900  sev- 
eral companies  yet  used  4  per  cent.,  but  that  is 
now  uncommon. 

In  very  few  companies  is  there  any  participa- 
tion in  the  excess  earnings  of  the  fund  which  is 
being  paid  out  in  instalments,  over  the  guaran- 
teed rate.  In  some  companies,  however,  there 
are  considerable  gains  to  beneficiaries  from  this 
source. 

Like  privileges  of  conversion  into  instalments 
for  a  fixed  term,  for  life  or  for  a  fixed  term  and 


100  BUSINESS  OF  LIFE  INSURANCE 

as  much  longer  as  the  insured  survives,  are  often 
granted  to  the  holder  of  an  endowment  policy, 
upon  its  maturity;  or,  if  it  is  payable  in  instal- 
ments, conversion  into  a  lump  sum  payment  of 
the  commuted  value.  And  in  some  companies, 
conversion  into  instalments  for  the  joint  lives 
of  the  insured  or  beneficiary  or  for  the  life  of  the 
last  survivor  of  them  or  for  a  fixed  term  and  so 
much  longer  as  the  last  survivor  survives. 

In  some  policies  with  deferred  dividends,  and 
in  some  policies  which  merely  permit  dividends 
to  accumulate  to  the  credit  of  the  policyholder, 
but  withdrawable  at  any  time,  it  is  provided 
that  when  the  whole  accumulation,  reserve  and 
surplus,  suffices — or  when,  as  other  policies  put 
it,  the  surplus  will  prepay  all  future  premiums — 
the  policy  shall  become  paid-up  if  the  policy- 
holder so  elects.  This  may  convert  a  whole  life 
policy  with  premiums  for  the  whole  period  of 
life,  into  a  limited-payment  policy,  or  may  ac- 
celerate the  completion  of  the  premium-paying 
period,  in  a  limited-payment  or  endowment  in- 
surance policy. 

And  when  the  accumulation,  reserve  and  sur- 
plus, equals  the  sum  insured,  according  to  the 
terms  of  the  policies  of  some  companies,  the 
policy  matures  as  an  endowment  or  may  do  so 
at  the  option  of  the  insured. 

In  both  these  convertible  features  the  com- 
pany may  or  may  not  have  provided  for  such 


CONVERTIBILITY  101 

apportionment  of  the  surplus  at  frequent  inter- 
vals as  will  enable  the  insured  to  know  when  the 
time  is  approaching  for  the  exercise  of  his  privi- 
lege of  conversion;  or  no  information  may  be 
given  until  notice  of  the  arrival  of  that  time  is 
sent  to  him  by  the  company. 

Another  form  of  convertibility  which  is  now 
allowed  by  some  companies  is  from  life  into 
limited-payment  or  endowment  insurance  or 
vice- versa.  It  has  not  yet  become  common.  The 
convenience  and  value  of  it  will  readily  be  seen 
from  the  following  specimens  of  such  privileges : 

Life  policy,  issued  age  35.  Premium,  $27.10. 
Table  of  Subsequent  Annual  Premiums  (after  a 
stated  number  of  premiums  paid).  To  pay-up 
the  policy  in  One,  Ten,  Fifteen  or  Twenty  An- 
nual Premiums  thereafter : 


SUBSEQUENT  ANNUAL  PREMIUMS. 


Years' 
Premiums 

Paid.           One. 

5      $472.79 
10        435.96 

Ten. 

$57.40 
53.36 

Fifteen. 
$42.53 

39.83 

Twenty. 

$35.46 
33.52 

15        393.89 

48.96 

37.00 

31.62 

20        347.70 

44.38 

34.21 

29.91 

To  see  the  advantages  given,  compare  the 
foregoing  rates  after  fifteen  j^ears  with  the  rates 
of  the  same  company  at  the  age  50,  which  are ; 


102  BUSINESS  OF  LIFE  INSURANCE 


ANNUAL  PEEMITJMS. 

One.  Ten.  Fifteen.  Twenty. 

Age  50      $704.94      $87.62      $66.22      $56.59 

Life  policy,  paid-up  in  twenty  years.  Issued 
age  35.  Premium,  $37.29.  Table  of  Subsequent 
Continuous  Annual  Premiums,  if  policy  is  con- 
verted into  a  whole  life  policy  at  end  of  any 
policy  year : 


End  of 
Year. 

Subsequent 
Premium. 

End  of 
Year. 

Subsequent 
Premium. 

1 

$26.52 

11 

$17.72 

2 

25.90 

12 

16.40 

3 

25.24 

13 

14.96 

4 

24.53 

14 

13.38 

5 

23.76 

15 

11.66 

6 

22.94 

16 

9.76 

7 

22.05 

17 

7.69 

8 

21.10 

18 

5.38 

9 

20.08 

19 

2.83 

10 

18.94 

20 

Paid-up 

The  benefits  plainly  appear  when  the  rate  of 
$18.94,  after  the  tenth  year,  is  compared  with 
the  full  premium  of  $39.10  for  age  45. 

Endowment  in  twenty  years.  Issued  at  age 
35.  Premium,  $47.55.  Table  of  Subsequent  Con- 
tinuous Annual  Premiums  (or  life  annuities  if 


CONVERTIBILITY  103 

full-paid)  if  policy  is  converted  into  a  whole  life 
policy  at  end  of  any  policy  year : 


End  of 

Subsequent           Life           End  of 

Subsequent 

Life 

Year. 

Premium.       Annuity.        Year. 

Premium,  Annuity. 

1 

$25.95 

11 

$8.30 

2 

24.70 

12 

5.64 

3 

23.36 

13 

2.74 

4 

21.94 

14 

Paid-up 

5 

20.41 

15 

n 

$    .43 

6 

18.75 

16 

li 

3.81 

7 

16.98 

17 

<( 

7.67 

8 

15.06 

18 

It 

11.90 

9 

12.98 

19 

tl 

21.58 

10 

10.73 

20 

(( 

30.00 

Many  men  buy  insurance  on  the  whole  life 
plan  temporarily,  intending  to  change  to  limited 
premiums  or  to  an  endowment  policy  later. 
Often  they  make  the  change  by  lapsing  or  sur- 
rendering the  life  policy  for  what  can  be  got  for 
it  or  by  negotiating  an  allowance  upon  the  new 
premium,  in  exchange  for  it.  But  that  they  re- 
ceive full  value  is  very  unlikely,  though  on  every 
account  they  should  because  they  still  continue 
the  insurance,  merely  paying  more  or  less  there- 
after as  the  changed  case  calls  for.  When  the 
foregoing  conversion  privileges  are  available 
they  do. 


CHAPTER   Xni 

INDIVIDUAL  ACCOUNTS. 

The  keeping  of  individual  accounts  with  mem- 
bers and  furnishing  them  with  statements  of  the 
same,  has  been  urged  on  two  grounds,  viz. :  To 
supply  them  with  information  concerning  the 
amount  of  surplus  accumulated  on  deferred  div- 
idend plans  and  to  inform  them  as  to  the  deriva- 
tion of  the  surplus. 

It  was  plainly  intended  by  the  charter  mem- 
bers of  the  ' '  Old  Equitable ' '  of  London  that  an 
intelligent  account  should  be  kept,  showing  the 
mode  of  division;  for  the  Deed  of  Settlement 
says: 

That  when  and  as  often  as  it  shall  appear  to  a 
General  Court  of  the  said  Society,  that  the 
Stock  of  the  said  Society  arising  from  pre- 
mimns,  is  more  than  sufficient  to  pay  the  claims 
made,  or  liable  to  be  made,  upon  the  said  So- 
ciety; then,  and  so  often  the  said  Society  shall, 
in  a  General  Court,  declare  a  Dividend  of  the 
surplus  or  of  such  part  thereof  as  shall,  by  the 
said  General  Court,  be  thought  and  judged  con- 

104 


INDIVIDUAL   ACCOUNTS  105 

venient,  amongst  the  then  Members  of  the  said 
Society  who  shall  be  Assured  with  the  said  So- 
ciety upon  (and  for  the  whole  continuance  of) 
their  respective  Lives,  in  manner  and  form  fol- 
lowing (that  is  to  say) : 

*'The  members  of  the  said  Society  who  shall 
be  assured  with  the  said  Society  upon  (and  for 
the  whole  continuance  of)  their  respective  lives 
(those  who  shall  have  so  become  Members  in  the 
then  current  year,  or  the  then  last  year  preced- 
ing, who  are  hereby  declared  to  be  incapable  of 
any  dividend,  only  excepted)  shall  be  divided 
into  classes  according  to  the  number  of  the  years 
of  their  standing  in  the  said  Society ;  and  those 
of  the  said  Members  of  the  Society  who  shall 
have  completed  one  entire  yearns  standing  in  the 
said  Society  on  or  before  the  last  day  of  Decem- 
ber next  preceding  the  declaration  of  the  said 
dividend,  shall  constitute  the  first  of  the  said 
classes ;  which  being  done,  the  sum  to  be  divided 
shall  be  allotted  to  the  several  classes  in  such 
order  that  the  sum  to  be  divided  among  the  sec- 
ond class  shall  be  twice  so  much  as  the  sum  to 
be  divided  amongst  the  first  class,  and  the  sum 
to  be  divided  amongst  the  third  class  shall  be 
thrice  so  much  as  the  sum  to  be  divided  amongst 
the  first  class ;  and  so  on  in  an  arithmetical  pro- 
gression, the  number  of  the  terms  of  which 
series  shall  be  the  number  of  the  said  classes, 
and  the  conmion  difference  of  which  series  shall 


106  BUSINESS  OF  LIFE  INSURANCE 

be  unity,  after  which  the  sums  so  allotted  to  each 
several  class  shall  be  subdivided  amongst  the 
individuals  of  each  class  in  proportion  to  the 
sums  by  them  respectfully  assured." 

The  delightfully  definite  manner  in  which  the 
declaration  of  bonuses,  really  made  in  defiance 
of  the  Deed  of  Settlement,  was  explained  by  the 
actuary  of  the  company  a  half  century  later  is 
in  marked  contrast : 

^^A  partition  of  the  profits  which  the  Society 
has  from  time  to  time  acquired,  so  far  as  hath 
been  deemed  prudent  and  safe,  has  been  made 
or  appointed  to  be  made  by  authority  of  Gen- 
eral Courts  of  the  Society,  bi/  extending  the 
allowance  to  Claimants  after  a  certain  rate  to  be 
computed  upon  the  sums  assured  for  every 
year's  premium  paid  upon  their  respective  Poli- 
cies prior  to  a  certain  day  in  such  several  Orders 
specified." 

These  are  the  earliest  instances.  They  have 
been  followed  by  many. 

During  the  later  years  of  his  life,  Elizur 
Wright,  the  great  actuary  and  ex-Commissioner 
of  Insurance  for  Massachusetts,  earnestly  cham- 
pioned a  system  of  individual  accounting  which 
he  called  the  "Savings  Bank  Plan,"  and  which 
he  explained  as  follows : 

"For  example:  Suppose  his  policy  is  for 
$1,000,  payable  at  death  or  fifty,  entered  at 
twenty-five  and  has  closed  its  ninth  year,  within 


INDIVIDUAL   ACCOUNTS  107 

this  fiscal  year  of  the  company.  Refftrring  to 
the  table,  we  find  his  reserve  at  the  end  of  his 
eighth  year  $207.49,  to  which  was  added  at  the 
beginning  of  the  ninth  $22.15,  making  the  self- 
insurance  fund  at  the  beginning  of  the  ninth 
year  $229.64.  Four  per  cent,  of  the  interest  was 
required  to  make  this  $238.83  at  the  end  of  the 
year,  and  1  per  cent,  to  pay  for  managing  the 
fund,  so  there  is  $2.30  of  surplus  from  self-insur- 
ance. The  normal  cost  of  insuring  him  that  year 
was  $6.53,  of  which  one-fifth,  or  $1.31,  was  saved, 
which  is  so  much  more  of  surplus  from  vitality. 
The  insurance  value  at  the  beginning  of  the  year 
was  $54.30.  Three  per  cent,  of  this  would  be 
$1.63  for  expenses,  to  which  if  2^  per  cent,  of  the 
premium  be  added  for  collection,  we  have  $2.45 
to  be  deducted  from  the  margin,  $4.23,  which 
leaves  surplus  from  that  source  of  $1.78.  Thus 
the  surplus  which  belongs  to  him  is : 

From  self-insurance,     $2.30 
From  insurance,  1.31 

From  margin,  1.78  $5.39 

"In  the  same  way,  if  the  policy  had  ended  its 
first  year  within  the  fiscal  year,  its  surplus 
would  have  been : 

From  self-insurance,     $0.21 
From  insurance,  1.46 

From  margin,  .86         $2.53 


108  BUSINESS  OF  LIFE  INSURANCE 

"And  for  its  twentieth  year  it  would  have 
been: 


From  self-insurance,     $6.70 
From  insurance,  .68 

From  margin,  3.09 

THE   TABLE   REFEKKED   TO. 


$10.47" 


Sj 

d 

■sa 

< 

? 

la 

25 

$4.24 

$7.30 

2e 

4.23 

7.24 

27 

4.23 

7.16 

28 

4.23 

7.08 

29 

4.23 

6.99 

30 

4.23 

6.90 

31 

4.23 

6.79 

32 

4.23 

6.67 

33 

4.23 

6.53 

34 

4.23 

6.37 

35 

4.23 

6.20 

36 

4.23 

600 

37 

4.23 

5.78 

38 

4.23 

5.54 

39 

4.23 

5.27 

40 

4.23 

4.96 

41 

4.23 

4.62 

42 

4.23 

4.24 

43 

4.23 

3.84 

44 

4.23 

3.41 

45 

4.23 

2.92 

46 

4.23 

2.36 

47 

4.23 

1.70 

48 

4.23 

.92 

49 

4.23 

.00 

60 

>> 

a 

ta 

"3 
o 

o. 
<u 
Q 

6 
t 

CD 

SI 

$977.75 
954.55 

$21.38 
21.44 

$2'2.25 

0 

1 

930.36 

21.52 

45.45 

2 

905.10 

21.60 

69.64 

3 

878.75 

21.69 

94.90 

4 

S51.2f 

21.78 

121.25 

5 

822.51 

21.89 

148.76 

6 

792.51 

22. '^1 

177.49 

7 

761.17 

22^15 

207.49 

8 

728.41 

22.31 

238.83 

9 

694.15 

22.48 

271.59 

10 

658.31 

22.68 

305.85 

11 

620.86 

22.90 

341.69 

12 

581.62 

2314 

379.14 

13 

540.52 

23.41 

418.38 

14 

497.47 

23.72 

459.48 

15 

452.33 

24.06 

502.53 

16 

405.03 

24.44 

547.67 

17 

355.37 

24:84 

594.97 

18 

303.30 

25.27 

644.61 

19 

248.64 

25.76 

696.70 

20 

191.21 

26.32 

751.36 

21 

130.79 

26.98 

808.79 

22 

67.15 

27.76 

869.21 

23 

.00 

28.68 

932.85 

24 

1000.00 

2S 

This  plan  was  not  tried  by  any  considerable 
company ;  but  it  may  fairly  be  doubted  whether 
it  would  have  been  commercially  successful,  had 
it  been  given  a  trial.  At  that  period,  more  per- 


INDIVIDUAL   ACCOUNTS  109 

haps  than  now,  men  seemed  to  love  to  be  mysti- 
fied and  misled  as  well.  They  were  predisposed 
to  believe  that  there  was  *'big  earning  power" 
in  life  insurance  and  this  rending  of  the  veil  of 
obscurity  from  the  transaction  rather  repelled 
than  attracted. 

The  companies  were  not  ready  for  it  in  any 
event.  It  showed  too  clearly  what  were  the  in- 
sured's equities,  in  those  days  when  cash  sur- 
render values  were  deemed  positively  dangerous 
and  even  ruinous. 

In  later  years  the  following  simpler  process 
has  been  suggested.  Credit  the  premium ;  charge 
out  the  policy's  share  of  actual  expenses — credit 
interest;  charge  out  the  policy's  share  of  actual 
losses.  The  remainder  is  the  fund  belonging  to 
the  policy  at  the  end  of  the  year.  With  this  fund 
as  a  basis,  continue  the  process  described,  year 
by  year.  At  the  end  of  any  year  deduct  the  re- 
quired reserve  and  the  remainder  is  surplus.  A 
few  of  the  smaller  companies  only  have  made 
use  of  it. 

The  objection,  which  is  openly  urged,  is  the 
labour  of  keeping  the  accounts.  Each  account 
requires  only  four  entries  per  annum,  when  pre- 
miums are  payable  annually;  only  seven,  even 
when  premiums  are  payable  quarterly.  Banks 
make  many  more  entries  daily  for  a  customet 
with  a  minimum  balance,  perhaps,  and  think 
nothing  about  it. 


no  BUSINESS  OF  LIFE  INSURANCE 

The  real  objections  are  that  it  strips  off  the 
mystery  and  explodes  the  notion  that  there  are 
marvellous  sources  of  profits  and  that  it  would 
expose  an  extravagant  expense  rate  when  pres- 
ent, discrimination  against  some  policies  in  ex- 
pense charges,  and,  if  expenses  were  charged  as 
per  their  incidence,  an  extravagant  cost  of  new 
business,  when  present. 

But  the  chief  reason  why  these  things  are  not 
done  is  because  patrons  of  life  insurance  do  not 
effectively  demand  it  by  preferring  companies 
which  keep  their  accounts  in  this  open  manner. 

Up  to  the  present  time,  then,  the  keeping  of 
individual  accounts  for  the  purpose  of  exhibit- 
ing the  transactions  plainly  and  fully,  has  made 
little  progress. 

Two  of  the  companies,  at  least,  which  for  a 
long  time  especially  urged  the  sale  of  deferred 
dividend  policies,  employed  a  system  of  individ- 
ual accounts  for  the  purpose  of  keeping  track  of 
the  accumulations  of  surplus,  and  also  furnish- 
ed the  policyholder  a  statement  upon  request. 
One  other  is  reported  to  have  kept  its  accounts 
in  this  manner,  but  would  not  furnish  a  state- 
ment to  the  individual  policyholder,  excepting, 
of  course,  merely  to  name  the  amount  of  the  sur- 
plus at  the  end  of  the  period. 

While  the  two  companies  first  mentioned  have 
been  successful,  there  is  no  indication  that  it 
was  due  to  the  feature  of  individual  accounts. 


INDIVIDUAL   ACCOUNTS  111 

The  system  employed  by  them  was  this :  They 
credited  each  year  to  a  deferred  dividend  policy 
the  same  dividend  as  to  an  annual  dividend  pol- 
icy of  the  same  amount,  kind,  date  and  age  at 
entry,  but  only  provisionally,  i.  e.,  subject  to 
survival  and  persistence.  The  surplus  account, 
with  these  dividends  as  a  basis,  was  then  cred- 
ited each  year  with  interest  and  gains  because 
of  surplus  forfeited  by  other  policies  by  death 
or  discontinuance. 

One  company,  with  policies  deferring  the  re- 
ceipt of  dividends  until  the  end  of  the  period, 
each  year  credits  the  proceeds  of  the  annual 
surplus,  accumulated  as  a  pure  endowment  to 
the  end  of  the  term,  and  advises  the  policy- 
holder how  much  is  credited.  Of  course,  dis- 
continuance, as  well  as  death,  forfeits  these 
credits,  however. 

Undoubtedly,  one  reason  why  some  companies 
did  not  favour  giving  statements  of  surplus  ad 
interim  was  because  they  feared  that  their  esti- 
mates might  not  be  realised,  and  so  preferred 
to  delay  the  disappointment  until  the  end. 

Not  very  courageous,  perhaps,  nor  very  frank 
and  ingenuous.  But  it  must  be  acknowledged 
that,  even  when  the  expected  results  were  in  a 
fair  way  to  be  realised  the  statements  were  of- 
ten misleading  to  the  policyholder,  who,  per- 
haps, expected  to  see  half  the  estimate  made 
good,  for  instance,  in  half  the  time.    The  com- 


112  BUSINESS  OF  LIFE  INSURANCE 

panies  which  furnished  the  statements  often 
found  them  undeservedly  embarrassing. 

If  supplied  by  all  companies,  however,  the  fa- 
cilities for  comparing  notes  would  doubtless  en- 
courage the  most  desirable  form  of  competition 
among  companies,  viz.,  competition  as  to  results 
to  policyholders.  This  would  also  effectively 
suppress  a  practice  known  to  have  appeared  in 
certain  quarters,  as  in  a  small  New  York  com- 
pany recently  brought  unfavourably  before  the 
public,  of  paying  to  policies  maturing  in  a  given 
year  surplus  which  has  not  been  accumulated 
from  previous  years,  but  is  part  of  the  current 
earnings.  It  is  plain  that,  with  a  growing  busi- 
ness, this  nefarious  thing  could  go  on  in  a  com- 
pany for  years  without  detection  or  exposure, 
and  indeed  has  done  so  more  than  once. 

Not  a  few  companies  go  so  far  as  to  hold  the 
accumulated  surplus  as  a  general  surplus  fund, 
not  even  apportioned  provisionally  among  the 
various  classes  of  policies. 


CHAPTEE    XIV 

STOCK    AND   MUTUAL  LIFE    INSURANCE  COMPANIES 

Life  insurance  companies  are  usually  divided 
into  three  classes : 

Stock  companies. 

Mutual  companies. 

Mixed  companies. 

To  these  may  be  added  yet  another  class : 

Mutual  companies  with  guaranty  capital. 

By  "stock  companies"  is  not  meant  merely 
companies  which  have  a  stock  capital,  for  that 
is  true  of  two  of  the  other  classes;  but  com- 
panies having  a  stock  capital  which  do  not  issue 
policies  under  which  participation  is  granted  to 
the  policyholders. 

When  the  first  life  insurance  company  to  do 
a  level  premium  business  was  organised  in  1762, 
there  were  two  of  these  companies  doing  busi- 
ness already.  They  offered  short-term  policies 
only,  from  one  year  to  seven  years,  at  the  uni- 
form annual  premium  of  five  per  cent,  per  an- 
num. And  their  objections  to  the  granting  of 
a  charter  to  the  new  company,  which  was  mu* 
tual,  prevailed  on  the  following  grounds: 

lis 


114  BUSINESS  OF  LIFE  INSURANCE 

"We  having  been  attended  with  counsel  on 
behalf  of  the  said  petitioners,  and  also  by  coun- 
sel on  behalf  of  the  Governors  and  Cos.  of  the 
London  and  Royal  Exchange  Assus.  Cos.,  and 
also  on  behalf  of  the  corp.  of  the  Amicable  So. 
for  a  perpetual  assu.  on  lives,  in  Serjeant's  Inn; 
the  said  companies  and  corporations  having  en- 
tered caveats  with  the  Attorney- General  against 
granting  the  prayer  of  the  said  petition,  and  the 
said  petitioners  and  their  opponents  having  pro- 
duced several  affidavits  annexed  to  this  in  our 
Rep.  We  have  proceeded  to  examine  the  same, 
and  after  the  best  consideration  we  have  been 
able  to  give  the  subject,  we  are  humbly  of  opin- 
ion to  advise  his  Majesty  not  to  comply  with  the 
prayer  of  this  petition,  for  the  following 
reasons : 

"1st.  Because  it  appears  to  us  altogether 
uncertain  whether  this  project  will  or  can  suc- 
ceed in  the  manner  in  which  it  is  proposed ;  and 
if  the  success  is  uncertain,  the  fund  for  support- 
ing it,  which  is  to  arise  from  the  profits  of  the 
undertaking,  will  be  precarious. 

"This  last  consideration  is  in  our  opinion  a 
fatal  objection  to  the  scheme,  for  though  an  un- 
dertaking plainly  calculated  for  the  benefit  of 
the  public  may  in  some  instances  deserve  en- 
couragement, even  where  the  success  is  dubious, 
yet  in  such  cases  the  projectors  alone  ought 
generally  to  abide  the  peril  of  the  miscarriage. 


INSURANCE   COMPANIES         115 

"In  the  present  proposal,  therefore,  whatever 
else  may  be  hazardous,  the  cap.  or  fund  to  an- 
swer losses  ought  to  be  certain  and  liable  to 
no  casualty,  for  which  reason,  when  the  legis- 
lature enabled  his  Majesty  to  erect  the  two  Corp. 
of  tJie  Royal  Exchange  and  the  London  Assu., 
they  thought  it  necessary  to  oblige  these  bodies, 
in  the  first  place,  to  raise  a  large  cap.  before 
they  began  to  insure. 

**2nd.  The  success  of  this  scheme  must  de- 
pend upon  the  truth  of  certain  calculations 
taken  upon  the  tables  of  life  and  death,  whereby 
the  change  of  mortality  is  attempted  to  be  re- 
duced to  a  certain  standard;  this  is  a  mere 
speculation,  never  yet  tried  in  practice,  and  con- 
sequently subject,  like  all  other  experiments,  to 
various  chances  in  the  execution. 

*'The  tables  upon  which  the  calculations  are 
built  are  the  Bills  of  Mort.  of  London,  and  the 
Breslau  tables,  and  admitting  them  to  be  strictly 
accurate  (of  which  there  is  strong  reason  to  be- 
lieve the  contrary),  they  are  compounded  of  dis- 
eased as  well  as  healthy  persons,  of  those  who 
are  embarked  in  dangerous  as  well  as  other  em- 
ployments, without  pointing  out  the  proportions 
they  bear  to  each  other,  and  yet  as  the  peti- 
tioners propose  to  insure  only  such  even  of  the 
healthy  as  are  not  employed  in  dangerous  occu- 
pations, the  register  of  life  and  death  ought  to 
be  confined,  if  possible,  for  tlie  sake  of  exact- 


116  BUSINESS  OF  LIFE  INSURANCE 

ness,  to  such  persons  only  as  are  the  objects  of 
ins.;  whereas  the  calculations  offered  embrace 
the  chance  of  life  in  general,  the  healthy  as  well 
as  unhealthy  parts  therefor,  which,  together 
with  the  nature  of  such  persons*  occupations, 
are  unknown  numbers. 

"As  the  fund  to  answer  losses  must  depend 
principally  upon  the  prems.  (for  we  pay  but 
little  regard  to  the  small  deposits  or  the  per- 
sonal covenant),  the  project  should  be  sure  of 
success;  otherwise  the  adventurers  will  be  un- 
done, or  greatly  injured,  and  the  calamity  will 
fall  the  heavier,  because  it  will  fall  principally 
upon  the  poorest  sort,  the  rich  having  no  temp- 
tation to  insure.  Under  these  circumstances,  if 
if  there  was  no  other  objection  to  the  scheme 
proposed,  the  uncertainty  of  success  would 
make  us  fearful  of  advising  the  charter. 

"We  are  the  more  apt  to  doubt  of  the  event, 
because  it  has  been  represented  to  us  by  the 
affidavit  of  Mr.  Savage,  that  all  the  profit  which 
has  been  received  by  the  Royal  Exchange  Assu. 
from  the  time  of  its  commencement  to  the  pres- 
ent time,  amounts  only  to  a  sum  of  £2,651  4s. 
6d.,  the  difference  between  £10,915  2s.  2d.  paid 
in  prems.,  and  the  sum  of  £8,263  17s.  8d.  dis- 
bursed in  losses,  which  small  profit  must  have 
been  near  exhausted  in  the  charges  of  manage- 
ment. If  then  this  corp.  who  are  charged  with' 
taking  unreasonable  prems.,  have  reaped  no 


INSURANCE   COMPANIES         117 

greater  profit,  we  can  hardly  expect  a  more  con- 
siderable capital  to  arise  from  lower  prems.; 
and  the  hazard  of  loss  will  be  increased  in  pro- 
portion as  the  dealing  will  be  more  extensive." 

A  New  York  stock  company  was  also  doing 
business  before  any  mutual  company  was  estab- 
lished here;  and  its  argument  in  1833  against 
granting  a  charter  to  a  new  company  is  mar- 
vellously like  the  reasoning  of  nearly  seventy- 
five  years  earlier.  In  Boston  and  Philadelphia 
a  similar  condition  obtained.  All  of  these 
American  stock  companies  retired  from  the  lists 
to  engage  in  other  businesses  when  mutual  com- 
panies were  established.  The  two  British  com- 
panies developed  chiefly  as  fire  insurance  com- 
panies, neglecting  the  life  branch  to  a  large 
degree. 

In  later  years  the  large  dividends  to  policy- 
holders in  the  mutual  companies  excited  the 
cupidity  of  exploiters,  and  stock  companies  were 
organised  to  offer  lower  rates  of  premium  than 
the  mutual  companies,  but  without  participa- 
tion. Several  trials  have  been  made  at  this, 
two  of  them  at  least  being  under  favouring  con- 
ditions. One  undertook  the  accident  business 
as  well  as  life,  and  for  nearly  thirty  years  sup- 
ported its  life  business  with  low  premiums,  by 
means  of  the  profits  of  its  accident  branch,  only 
to  surrender  and  introduce  participating  plans 
recently.  The  other  set  forth  with  a  capital  of 


118  BUSINESS  OF  LIFE  INSURANCE 

unprecedented  amount  and  with  several  of  the 
strongest  financiers  among  its  directors,  only  to 
discover  that  non-participating  business  alone 
offered  doubtful  and  at  best  scanty  rewards  for 
the  capital  invested. 

It  has  recently  been  said  in  this  series  that 
insurance  is  essentially  mutual.  This  is  espe- 
cially true  of  life  insurance,  as  the  following 
from  a  famous  decision  of  the  Supreme  Court 
of  the  United  States  clearly  demonstrates : 

' '  The  insured  parties  are  associates  in  a  great 
scheme.  This  associated  relation  exists  whether 
the  company  be  a  mutual  one  or  not.  Each  is 
interested  in  the  engagements  of  all;  for  out 
of  the  co-existence  of  many  risks  arises  the  law 
of  average  which  underlies  the  whole  business. 
An  essential  feature  of  this  scheme  is  the  mathe- 
matical calculations  referred  to,  on  which  the 
provisions  and  the  amounts  assured  are  based. 
And  these  calculations,  again,  are  based  on  the 
assumption  of  average  mortality  and  of  prompt 
payments  and  compound  interest  thereon." 

It  is  these  facts,  no  doubt,  which  have  oper- 
ated to  cause  mutual  life  insurance,  i.  e.,  with 
the  participation  of  policyholders,  to  be  more 
popular  and  satisfactory;  and  has  caused  com- 
panies, whether  purely  mutual  or  mixed,  or  mu- 
tual with  guaranty  capital,  if  offering  partici- 
pating life  insurance,  to  score  great  successes, 
while  companies  offering  non-participating  pol- 


INSURANCE   COMPANIES         119 

iciee  only  have  dwindled  and  failed  to  prosper. 
It  should  be  said,  however,  that  the  failure  of 
reserve  laws  to  regard  the  necessity  for  a  pro- 
vision for  first  year's  expenses  hits  the  stock 
companies  with  low  premiums  much  harder 
than  mutual  companies  with  larger  premiums, 
and  that  while  policyholders  will  purchase  de- 
ferred dividend  policies,  the  want  of  prompt 
and  regular  dividend  returns  is  a  serious  matter 
with  stockholders. 

Stock  companies  are,  of  course,  controlled  and 
governed  by  the  stockholders,  usually  by  means 
of  proxy  voting.  The  majority  is  nearly  always 
all-powerful ;  sometimes  a  system  of  cumulative 
voting  enables  the  minority  to  be  represented. 

The  insured  have,  of  course,  an  interest  in 
these  companies.  Accumulations  from  their 
premiums  are  in  the  company's  keeping  as  re- 
serves. But  they  are  not  interested  in  the  prof- 
its, and  can  have  but  slight  reason  to  expect  to 
be  given  a  voice  in  the  management.  Yet  in 
some  cases  even  this  has  been  granted,  the  mil- 
lions of  dollars  of  policyholders '  money  appeal- 
ing for  protection  against  the  paramount  in- 
terests of  a  hundred  thousand  or  so  invested  in 
capital  stock. 

Elizur  Wright,  when  commissioner  of  Massa- 
chusetts, once  said  in  his  annual  report :  ''When- 
ever and  wherever  life  insurance  offices  are 
needed  they  may  easily  and  safely  be  organised 


120  BUSINESS  OF  LIFE  INSURANCE 

by  a  sufficient  number  subscribing  to  be  in- 
sured. ' ' 

Mutual  companies  are  quite  as  comprehen- 
sible as  stock  companies.  They  are  composed 
of  policyholders,  with  mutual  obligations  and 
mutual  benefits.  Their  policies  or  most  of  them 
are  participating.  There  is  no  capital  stock; 
and  the  mutual  company  with  all  its  assets  is 
the  property  of  the  policyholders. 

At  the  outset  the  premiums  of  the  mutual  life 
insurance  companies,  while  ample  and,  as  it 
proved,  redundant,  were  much  less  than  the  pre- 
miums charged  by  the  stock  companies.  After- 
ward, however,  when  mutual  life  insurance  was 
a  demonstrated  success,  this  was  reversed,  and 
stock  companies  have  had  to  charge  for  non- 
participating  insurance  much  lower  premiums 
than  the  premiums  on  participating  plans. 

The  mutual  life  insurance  companies  have 
rendered  this  necessary  by  two  methods.  First, 
by  paying  liberal  dividends  on  participating 
policies;  and,  second,  by  offering  non-partici- 
pating or  limited-participating  policies  at  very 
low  rates  of  premiums.  Against  competition  of 
the  last  mentioned  sort  the  president  of  the  most 
important  company  doing  a  non-participating 
business  only,  protested  a  few  years  ago,  on  the 
ground  that  for  a  mutual  company  to  issue  non- 
participating  policies  is  clearly  improper  and 
almost  certainly  unlawful.  In  consequence  some 


INSUEANCE   COMPANIES         121 

companies  desisted,  offering  policies  with  pre- 
miums nearly  as  low,  but  with  limited  participa- 
tion. But  the  power  has  not  been  tested,  and 
some  companies  do  not  seem  to  fear  that  their 
right  to  admit  members  on  a  non-participating 
basis  will  actually  be  contested,  or  if  contested 
will  not  be  upheld.  The  gain  to  stock  companies 
would  be  little  in  any  event,  for  there  would  be 
nothing  to  prevent  a  mutual  company  from 
naming  as  low  premiums  for  a  special  form  of 
participating  insurance  as  now  for  non-par- 
ticipating. 

The  advent  of  mutual  insurance,  then,  not 
merely  deprived  the  few  stock  companies  al- 
ready in  existence  of  the  monopoly  which  en- 
abled them  to  charge  exorbitant  rates  of  pre- 
mium ;  but  also  even  to  this  day  has  caused  non- 
participating  rates  to  range  so  low  that  stock 
companies,  offering  non-participating  insurance 
only,  have  been  at  a  disadvantage.  At  the  pres- 
ent time  much  the  lowest  non-participating 
rates  are  offered  by  mutual  and  mixed  com- 
panies ;  and  only  one  large  company  confines  its 
business  to  non-participating  policies,  and  that 
not  in  its  intermediate  or  its  industrial  de- 
partment. 

Mutual  companies  are,  in  theory  at  least,  con- 
trolled and  governed  by  their  members.  The 
following  are  the  modes  in  use  for  obtaining 
an  expression  of  the  will  of  the  members : 


122  BUSINESS  OF  LIFE  INSURANCE 

All  give  the  privilege  of  voting  in  person  to 
all  members  who  attend  the  meeting;  for  mem- 
bers who  do  not  attend  provision  is  made — 

1.  By  means  of  proxies,  good  until  revoked. 

2.  By  means  of  proxies,  good  for  a  limited 
period. 

3.  By  means  of  proxies,  good  for  the  meet- 
ing only. 

4.  By  means  of  proxies,  good  for  the  meet- 
ing only;  officers,  agents  and  employees  not  to 
vote  proxies;  nor  any  other  member  to  repre- 
sent more  than  $100,000  insurance  in  that  man- 
ner. 

5.  By  means  of  direct  voting  by  mail. 

All  of  these  methods  have  secured  reasonably 
stable  tenure  of  offices,  mainly  subject  only  to 
failure  to  re-elect  on  account  of  misconduct; 
but  the  influence  of  the  members  upon  the  man- 
agement is  different  under  the  different  sys- 
tems, and  the  difficulty  of  getting  rid  of  officers 
who  have  mismanaged  affairs  is  much  greater 
under  some  of  the  systems  than  under  others. 

There  have  been  extensive  changes  in  the  per- 
sonnel of  the  officers,  for  cause,  however,  even 
under  the  system  of  proxies  good  until  revoked, 
and  the  system  of  proxies  good  for  a  limited 
time.  Yet  each  of  these  modes  is  subject  to  the 
serious  objection  that  they  enable  one  man  or  a 
few  men  to  control  absolutely,  except  when,  by 
the  exposure  of  some  glaring  instance  of  official 


INSURANCE   COMPANIES         123' 

misbehaviour,  a  revolution  of  sentiment  causes 
a  larger  number  of  the  members  to  insist  upon 
liis  or  their  retirement. 

Under  these  methods,  borrowed  from  the 
practice  in  stock  companies,  and  really  little 
suited  to  the  requirements  of  mutual  companies, 
the  interest  and  vigilance  of  the  members  are 
suppressed,  and  they  are  made  to  feel  that  they 
have  no  voice  in  the  management  of  their  own 
companies.  They  stay  away  from  the  meetings 
and  concern  themselves,  not  at  all,  well  knowing 
that  they  can  learn  nothing  even  of  what  is  be- 
ing done,  and  that  their  votes,  if  cast  in  person, 
will  be  overwhelmed  by  the  vast  number  of 
proxies  which  the  managers  can  cast.  So  com- 
plete is  this  discouragement  that  it  is  rarely 
necessary  for  the  proxies  to  be  voted  at  all ;  but 
they  are  on  hand — one  witty  president  called 
them  "the  children  of  Israel"  because  they  had 
never  been  numbered — ready  to  beat  down  any 
protest  against  the  men  in  control. 

In  the  two  revolutions  which  have  taken  place, 
notwithstanding  these  systems,  one  was  success- 
ful because  of  public  exposure  of  the  proxy- 
holder's  mismanagement,  with  a  hostile  insur- 
ance department  and  with  even  his  supporters 
advising  against  holding  out.  The  other  was 
the  result  of  a  counter  conspiracy ;  one  clique  of 
oflScers,  holding  the  proxies,  aimed  at  elevating 
a  certain  officer  to  the  presidency,  and  other 


124  BUSINESS  OF  LIFE  INSURANCE 

officers  secretly  collected  proxies  and  at  the  elec- 
tion outvoted  them.  This  would  manifestly  have 
been  more  difficult,  had  he  once  been  elected 
president;  and,  in  any  event,  little  can  be  said 
in  favour  of  a  system  which  admitted  of  a 
change  of  management  only  by  means  of  what 
must  be  called  a  secret  conspiracy,  though  in 
this  case  for  good  motives  and  for  good  cause. 

It  is  claimed  for  these  systems  that  they  per- 
petuate a  good  management.  This  is  only  frue 
in  most  cases,  provided  the  chief  officer  is  de- 
sirous of  it,  for  usually  he  holds  the  proxies. 
Sometimes,  however,  the  proxies  run  to  a  com- 
mittee or  to  several  persons,  authorising  any 
one  of  them  to  cast  the  votes.  Under  this  ar- 
rangement, perhaps,  a  little  more  security  that 
the  management  shall  not  be  subjected  to  one 
man's  will,  may  be  attained,  whether  for  better 
or  for  worse  it  is  not  so  sure.  The  latter  plan 
does  accomplish  one  thing,  however,  viz.,  to  con- 
tinue the  proxies  beyond  the  lifetime  of  the  chief 
officer,  and  thus  powerfully  to  influence  the  di- 
rectors, perhaps,  in  their  choice  of  his  successor 
through  their  knowledge  that  they  will  still  have 
a  master.  Even  this  may  l)e  preferable,  how- 
ever, to  a  scramble  over  that  position. 

Under  both  these  systems  proxies  are  secured 
as  quietly  and  unobtrusively  as  possible,  pre- 
cautions being  taken  against  apprising  the  mem- 
bers too  vividly  of  their  latent  power.    The  ex- 


INSURANCE   COMPANIES         125 

periment  has  been  tried,  though  not  by  com- 
panies of  standing,  of  printing  the  proxy  ap- 
pointment— even  made  perpetual  and  irrevoca- 
ble— in  the  application  form,  to  be  signed  by 
every  person  admitted  to  the  company.  This 
has  been  discarded  as  of  doubtful  legality  and 
of  not  doubtful  impropriety.  But  proxies  are 
often  taken  when  policies  are  delivered ;  and  it 
is  one  of  the  implied  duties  of  trusted  general 
agents  to  collect  proxies  for  the  management. 

The  desire  to  avoid  reminding  the  members 
of  their  rights  and  powers  has  prevented  the 
plan  of  calling  for  proxies  for  each  meeting,  or 
even  for  short  periods  only,  becoming  popular 
with  officers  of  mutual  companies.  It  would 
have  advantages,  obviously,  from  the  standpoint 
of  the  policyholders,  because  if  there  were  good 
cause  for  dissatisfaction  there  would  at  least  be 
an  opportunity  for  resistance,  though  with  the 
odds  strongly  in  favour  of  the  entrenched  man- 
agement, with  its  superior  facilities  for  reach- 
ing the  members. 

The  fundamental  evil  and  danger  in  the  proxy 
system,  under  even  its  most  innocent  phases,  is 
that  it  enables  the  votes  of  the  most  indifferent 
and  unthinking  members — precisely  the  men 
who  give  proxies  to  an  existing  management 
without  hesitation — to  be  cast  against  the  votes 
of  members  who  really  consider  the  needs  of  the 
company.  It  is  as  if  in  our  governmental  affairs 


126  BUSINESS  OF  LIFE  INSURANCE 

we  were  to  permit  politicians,  after  getting 
office,  actually  to  vote  as  proxies  for  the  stay-at- 
homes  and  incompetents.  The  system  takes  ad- 
vantage of  the  weakness  of  human  nature,  the 
want  of  initiative  in  the  average  man,  and  his 
disinclination  to  make  trouble,  and  turns  this 
against  the  intelligence  and  interest  of  the  men 
who  would  guard  the  common  weal.  That  this 
is  true  is  abundantly  shown  by  the  great  care 
taken  not  to  stir  up  the  policyholders. 

The  system  of  proxies,  good  for  the  meeting 
only,  and  with  restrictions  against  persons  .con- 
nected with  the  company  as  officers,  directors, 
agents  and  employees  acting  as  proxy-voters, 
and  against  more  than  $100,000  insurance  be- 
ing represented  in  proxies  by  one  man,  was  in- 
troduced in  one  company,  after  a  revolution  un- 
der the  unlimited  sj'^stem.  It  is  undoubtedly  an 
improvement,  requiring  the  directors  and  offi- 
cers to  work  together  smoothly  in  order  to  avoid 
risk  of  an  upheaval,  and  holding  them  much 
more  strictly  to  account.  A  similar  provision 
governing  all  the  mutual  companies  of  Massa- 
chusetts is  found  in  the  laws  of  that  State. 

Several  companies  permit  only  those  mem- 
bers to  vote  who  present  themselves  at  the  meet- 
ing. Theoretically  this  is  perilous,  exposing 
the  management  to  the  danger  of  being  over- 
whelmed by  a  conspiracy  on  the  part  of  a  com- 
paratively small  number  of  the  members.  Prac- 


INSURANCE   COMPANIES         127 

tically,  also,  there  has  been  at  least  one  instance 
of  an  overthrow  of  the  management  in  part,  per- 
haps well  deserved,  but,  notwithstanding,  unex- 
pected. No  case  can  be  cited  of  an  attempt  to 
get  control  of  a  mutual  company  by  means  of 
a  packed  meeting  on  the  part  of  persons  not 
connected  with  the  management,  and  whose  pur- 
poses were  evil. 

These  are  the  only  forms  of  government  of 
mutual  life  insurance  companies  in  vogue  in 
the  United  States.  The  fraternal  life  insurance 
societies  are  governed  by  representatives, 
elected  by  the  members,  but  no  regular  mutual 
life  insurance  company  has  made  a  trial  of  that 
system.  Very  probably  the  managers  of  such 
a  company  would  prefer  the  evils  of  any  of  the 
proxy  systems  to  the  interferences,  criticisms 
and  log-rolling  of  the  representative  plan. 

The  largest  life  insurance  company  in  the 
British  empire,  the  Australian  Mutual  Provi- 
dent Society,  has  for  many  years  afforded  its 
members  a  full  opportunity  for  expressing  their 
wishes  by  granting  them  the  privilege  of  send- 
ing in  their  votes  for  directors  by  mail  if  not 
in  attendance  at  meeting. 

No  important  difficulties  have  arisen  in  con- 
nection with  the  operation  of  this  system.  It 
is  practically  free  from  company  politics.  There 
is  no  log-rolling,  ynlike  the  proxy  system,  it 
does  not  result  in  the  most  indifferent  members 


]28  BUSINESS  OF  LIFE  INSURANCE 

being  represented,  but  only  in  those  who  are  in- 
terested and  have  opinions  and  preferences  to 
express.  The  opportunity  to  vote  is  given  to 
all,  however ;  not  virtually  denied  to  most  of  the 
members,  as  under  every  one  of  the  systems  in 
use  here. 

There  has  been  but  one  revolution  in  the  great 
company  which  has  demonstrated  the  success 
of  the  plan.  Doubtless  there  would  have  been 
more,  had  they  been  called  for;  but  the  sense 
of  strict  accountability  to  the  members  has  kept 
the  officers  to  their  duties.  This  is  also  appar- 
ent in  the  unparalleled  service  which  this  com- 
pany has  given.  In  dividend  returns  to  policy- 
holders, in  liberal  features  of  all  kinds,  in  non- 
forfeiture, in  economy  and  effectiveness  o'f 
field  work,  in  ratio  of  new  insurance  to  popula- 
tion in  its  field,  in  percentage  of  old  business 
saved,  in  favourable  mortuary  experience,  its 
career  is  unprecedented. 

This  method  is  modern  and  consonant  with 
the  means  of  communication  suitable  to  our  age. 
It  is  a  machinery  by  means  of  which,  without 
excitement  or  company  politics,  the  conserva- 
tive premium  payers  in  a  mutual  company  may 
approve  or  disapprove  the  acts  or  the  proposed 
acts  of  the  officers  and  directors  by  re-electing 
them  or  failing  to  re-elect  them. 

The  present  laws  of  New  York  provide  that 
proxies  in  mutual  life  insurance  companies  shall 


INSURANCE    COMPANIES         129 

be  for  a  term,  not  exceeding  ten  years,  and  if 
not  for  a  specified  duration,  shall  be  for  eleven 
months  only.  They  also  provide  that  the  by- 
laws may  designate  what  person  or  persons  may 
receive  proxies,  thus  enabling  the  directors  to 
control  the  matter.  A  stricter  system  of  control 
and  self-perpetuation  by  the  board  of  directors 
has  been  mooted,  such  as  obtains  in  mutual  sav- 
ings banks,  viz.,  that  the  term  of  office  be  dur- 
ing good  behaviour,  and  vacancies  be  filled  by 
the  board.  Something  like  this  is  attempted  in 
the  settlement  of  the  troubles  of  the  Equitable 
Life  Assurance  Society  of  New  York,  which  en- 
ables and  directs  trustees  to  cast  the  votes  of  a 
majority  of  the  stock  for  candidates,  twenty- 
eight  of  whom  are  selected  by  the  policyholders 
and  twenty-four  by  the  board  of  directors. 


CHAPTER    XV 

MUTUAL  COMPANIES  WITH  GUARANTY  CAPITAL  AND 
MIXED  COMPANIES 

With  the  exception  of  one  company,  which. 
was  purely  mutual  from  its  inception,  the  older 
Massachusetts  companies  that  are  now  mutual 
set  out  with  a  guaranty  capital.  The  conditions 
concerning  this  capital  were  that  it  should  be 
entitled  to  a  preferential  dividend  of  seven  per 
cent,  and  that  one-third  or  one-fourth  of  the  sur- 
plus should  be  accumulated  until  it  became  suf- 
ficient to  retire  the  capital  stock  at  par,  which 
could  be  done  thereafter  whenever  the  policy- 
holders voted  to  do  so. 

All  the  older  Massachusetts  companies  have 
retired  the  stock,  except  one  company,  which  yet 
has  $25,500  outstanding. 

While  the  stock  remained  in  force  half  the  di- 
rectors were  elected  by  the  members  and  half 
by  the  stockholders,  but  to  be  either  a  stock- 
holder or  a  member  was  sufficient  qualification 
for  a  director.  The  transfer  from  mutual  com- 
panies with  guaranty  capital  to  purely  mutual 

130 


MUTUAL  AND  MIXED  COMPANIES  13i. 

companies  was  in  no  case  attended  with  an  ap- 
heaval  or  change  of  management;  and  how  little 
influence  the  members  have  exercised  under  the 
system  of  proxy-voting  is  shown  by  their  failure 
to  vote  the  retirement  of  the  remnant  of  capital 
stock  in  one  of  the  companies. 

Of  other  companies  which  are  now  purely  mu- 
tual, only  one  set  out  originally  as  a  mutual 
company  with  a  guaranty  capital.  Originally 
in  that  company  the  stockholders  only  elected 
the  directors;  by  amendment,  this  was  later 
made  members  and  stockholders,  either  also  be- 
ing eligible.  There  was  no  limit  to  stock  divi- 
dends and  no  provision  for  retiring  the  stock, 
notwithstanding  which  it  has  been  retired. 

One  company  was  at  the  outset  a  mixed  com- 
pany, i.  c,  a  stock  company,  with  complete  con- 
trol in  the  stockholders  and  no  limit  to  stock 
dividends.  But  the  sale  of  the  controlling  in- 
terest to  persons  who  had  made  a  wreck  of  an- 
other company  caused  the  State  department  and 
legislature  to  interfere  and,  by  special  act  of  the 
legislature,  the  members  were  enabled  to  pur- 
chase and  retire  the  stock. 

One  State  at  least,  New  Jersey,  now  makes 
provision  in  its  general  laws  for  incorporation 
of  mutual  companies  with  guaranty  capital  and 
for  the  retirement  of  the  capital  stock.  Sev- 
eral States  permit  the  organisation  of  such  com- 
panies, but  usually  without  compulsory  pro- 


132  BUSINESS  OF  LIFE  INSURANCE 

visions  for  retirement.  Between  such  com- 
panies and  mixed  companies,  by  which  is 
meant  stock  companies  which  sell  partici- 
pating policies,  it  is  somewhat  difficult  to 
distinguish;  but  careful  and  conservative  stu- 
dents of  life  insurance  incline  to  hold  that  the 
following  distinction  is  the  important  one,  viz., 
are  the  shareholders  interested,  directly  or  in- 
directly, by  way  of  cash  dividend  or  otherwise, 
in  the  profits  of  the  company  beyond  a  certain 
fixed  or  limited  dividend?  If  not  so  interested 
it  is  a  mutual  company  with  guaranty  capital; 
if  so  interested,  a  mixed  company,  i.  e.,  a  stock 
company  which  issues  participating  policies. 

In  other  particulars  mutual  companies  with 
guaranty  capital  are  sometimes  more  like  stock 
companies  than  are  some  mixed  companies  or 
stock  companies  which  issue  participating 
policies. 

One  other  mixed  company  also  retired  its 
stock.  This  stock  was  paid  for,  in  fact,  merely  to 
comply  with  the  then  laws  of  that  State  in  trans- 
ferring the  company  from  an  assessment  com- 
pany to  a  regular  life  insurance  company,  and 
was  at  once  retired,  the  company  having  more 
than  the  required  amount  of  policyholders^  sur- 
plus from  the  first  day. 

There  are  in  New  York  City  three  companies 
which  come  within  the  definition  of  mutual  with 
a  guaranty  capital. 


MUTUAL  AND  MIXED  COMPANIES  133 

One  of  these  limits  its  dividends  on  stocks  to 
twelve  per  cent,  per  annum.  It  has  no  provision 
for  retiring  the  stock ;  the  directors  are  elected 
by  the  stockholders  voting  in  person  or  by 
proxy,  and  the  policyholders  voting  in  person. 
No  qualification  for  a  director  is  named  in  the 
charter. 

Another  limits  the  dividend  on  stock  to  seven 
per  cent.;  has  no  provision  for  retiring  the 
stock;  permits  stockholders  only  to  vote  for 
directors,  and  makes  the  following  qualification 
for  a  director,  viz.,  ''That  he  owns  and  holds  in 
his  own  right  at  least  ten  shares  of  the  capital 
stock  of  the  company."  There  is  also  the  fol- 
lowing provision  in  the  charter : 

"The  insurance  business  of  the  company 
shall  be  conducted  on  the  principle  of  giving  to 
policyholders  an  interest  in  the  profits  of  the 
company,  as  hereinafter  provided,  unless  other- 
wise expressly  agreed  between  the  company  and 
the  assured." 

The  third,  which  has  grown  to  become  one  of 
the  largest  companies  in  the  United  States, 
limits  the  dividend  on  stock  to  seven  per  cent, 
per  annum,  and  the  following  further  provision, 
''that  the  earnings  and  receipts  of  said  com- 
pany over  and  above  the  dividends,  losses  and 
expenses,  shall  be  accumulated." 

Also  the  following: 

"The  officers  of  the  company,  within  sixty 


134  BUSINESS  OF  LIFE  INSURANCE 

days  after  the  expiration  of  the  first  five  years 
from  December  31,  1859,  and  within  the  first 
sixty  days  of  every  subsequent  period  of  five 
years,  shall  cause  a  balance  to  be  struck  of  the 
affairs  of  the  company,  which  shall  exhibit  its 
assets  and  liabilities,  both  present  and  con- 
tingent, and  also  the  net  surplus,  after  deduct- 
ing a  sufficient  amount  to  cover  all  outstanding 
risks,  and  other  obligations.  Each  policyholder 
shall  be  credited  with  an  equitable  share  of  the 
said  surplus." 

There  is  no  provision  for  the  retirement  of 
the  stock ;  the  qualification  of  a  director  is  that 
he  must  be  proprietor  of  at  least  five  shares  of 
the  said  capital  stock,  and  the  provision  for  the 
election  of  directors  is  as  follows: 

*'In  the  election  of  directors  every  stock- 
holder in  the  company  shall  be  entitled  to  one 
vote  for  every  share  of  stock  held  by  him,  and 
such  vote  may  be  given  in  person  or  by  proxy. 
At  any  time  thereafter,  the  board  of  directors, 
after  giving  notice  at  the  two  previous  stated 
meetings,  may,  by  a  vote  of  three-fourths  of  all 
the  directors,  provide  that  each  life  policy- 
holder, who  shall  be  insured  in  not  less  than 
five  thousand  dollars,  shall  be  entitled  to  one 
vote  at  the  annual  election  of  directors,  but  such 
vote  shall  be  given  personally,  and  not  by 
proxy. ' ' 

The  two  companies  last  mentioned  are  the 


MUTUAL  AND  MIXED  COMPANIES  135 

only  companies  in  the  United  States  in  which  all 
the  surplus  (beyond  the  fixed  dividend)  belongs 
to  the  policyholders,  and  the  stockholders  only 
vote  for  directors.  Both  have  been  unpleasantly 
before  the  public  of  late,  mainly  because  of  ef- 
forts of  majority  holders  of  the  stock  to  get 
larger  returns,  indirectly. 

There  are  three  such  companies  outside  of  the 
State  of  New  York. 

One  of  these  limits  its  dividends  on  stock  to 
10  per  cent. ;  makes  no  provision  for  retirement 
of  stock;  provides  for  the  election  of  directors 
by  stockholders  voting  in  person  or  by  proxy, 
and  by  members  voting  in  person  only.  The 
qualification  of  a  director,  ownership  of  at  least 
ten  shares  of  the  guaranty  capital  of  the 
company. 

Another  limits  its  dividend  on  stock  to  7  per 
cent.,  preferred;  makes  provision  for  retire- 
ment, when  it  is  voted  by  members,  and  that 
one-fourth  of  the  net  surplus  may  be  applied  to 
retire  the  stock.  Of  the  original  guaranty  capi- 
tal only  $25,500  is  outstanding.  The  directors 
are  elected  one-half  by  the  stockholders  and  one- 
half  by  the  members,  voting  in  person  or  by 
proxy,  and  a  director  may  either  be  a  stock- 
holder or  a  member. 

The  third  limits  the  dividend  on  stock  to  7  per 
cent.,  makes  no  provision  for  retirement,  and 
permits  the  directors  to  be  elected  from  and  by 


136  BUSINESS  OF  LIFE  INSURANCE 

the  policyholders.  It  was  originally  a  purely 
mutual  company  and  the  guaranty  capital  was 
put  in  later. 

There  are  in  New  York  six  companies  that 
fall  within  the  definition  of  mixed  companies,  or 
stock  companies  that  issue  participating  poli- 
cies. 

One  of  those  limits  the  dividend  on  stock  to  7 
per  cent.,  preferred,  plus  20  per  cent,  of  the  re- 
maining surplus ;  makes  no  provision  for  the  re- 
tirement of  stock ;  provides  for  election  of  direc- 
tors by  stockholders,  voting  in  person  or  by 
proxy,  and  by  policyholders  voting  in  person 
only,  and  makes  as  a  qualification  for  a  direc- 
tor that  he  be  a  proprietor  of  at  least  ten  shares 
of  the  capital  stock  of  the  company  owned  for  at 
least  thirty  days  prior  to  the  election. 

Another  company  limits  its  dividend  on  stock 
to  7  per  cent,  per  annum,  plus  one-eighth  of  the 
net  surplus ;  makes  no  provision  for  retirement 
of  stock ;  provides  for  the  election  of  directors 
by  stockholders  and  policyholders  voting  in  per- 
son or  by  proxy,  and  names  as  a  qualification  of 
the  directors  that  one-half  must  be  persons  own- 
ing not  less  than  ten  shares  of  the  capital  stock, 
and  one-half  may  be  policyholders.  The  follow- 
ing is  a  special  provision  of  its  charter : 

*'The  capital  of  the  company  may  be  in- 
creased indefinitely  by  the  accumulation  of  prof- 
its, except  as  hereinafter  provided.    The  accu- 


MUTUAL  AND  MIXED  COMPANIES  137 

mulated  capital  shall  be  represented  by  scrip, 
which  shall  be  issued  from  time  to  time  to  the 
policyholders." 

Another  limits  its  cash  dividend  upon  its 
stock  to  7  per  cent,  per  annum,  and  its  charter 
contains  the  following  special  provisions  under 
amendments : 

' '  On  the  first  day  of  January  in  each  year,  or 
within  sixty  days  thereafter,  a  valuation  of  the 
assets  and  liabilities  of  the  company  shall  be 
made,  and  after  placing  to  the  credit  of  the 
stockholders  7  per  cent,  on  the  amount  to  the 
capital  stock,  which  may  be  paid  to  the  stock- 
holders, one-half  on  the  15th  day  of  May  and 
the  remaining  one-half  on  the  15th  day  of  No- 
vember, and  after  providing  for  all  the  out- 
standing liabilities  of  the  company,  all  the  re- 
maining profits  or  surplus  of  the  company  shall 
be  placed  to  the  credit  of  the  policyholders  who 
may  be  entitled  to  participate  in  the  profits  or 
surplus  of  the  company  in  proportion  to  the 
amount  of  premiums  paid  respectively,  as  here- 
inafter provided,  which  credit  may  be  represent- 
ed by  scrip,  subject  to  all  the  provisions  of  this 
charter ;  but  no  credit  or  scrip  shall  be  made  for 
any  fractional  part  of  a  dollar,  nor  shall  any 
policyholder  be  entitled  to  a  credit  for  profits 
who  has  not  been  insured  for  three  full  years, 
and  whose  policy  for  life,  or  endowment,  is  not 
in  actual  force  at  the  time. 


138  BUSINESS  OF  LIFE  INSURANCE 

* '  On  the  first  day  of  January  of  each  year,  or 
within  sixty  days  thereafter,  a  valuation  of  the 
assets  and  liabilities  of  the  company  shall  be 
made,  and,  after  providing  for  the  liabilities  of 
the  ordinary  department,  the  net  surplus  de- 
rived from  the  business  of  said  department  shall 
be  credited  to  such  policyholders  of  said  depart- 
ment as  may  be  entitled  to  participate  in  such 
surplus.  Then,  after  providing  for  the  liabili- 
ties of  the  'industrial  department'  and  interest 
upon  tht  capital  stock,  the  net  surplus  derived 
from  the  business  of  said  industrial  department 
shall  be  added  to  the  capital  stock  as  additional 
security  to  the  policyholders." 

There  is  a  provision  for  the  retirement  of  one- 
half  of  the  capital  as  follows : 

"When  the  gross  assets  of  the  company  shall 
amount  in  value  to  five  hundred  thousand  dol- 
lars it  shall  be  lawful  for  the  directors  to  retire 
one-half  of  the  capital  stock  of  the  company  by 
payment  to  the  stockholders  of  one-half  of  the 
par  value  of  the  stock,  and  by  issuing  to  each 
stockholder,  on  such  payment,  a  new  certificate, 
reducing  each  stockholder's  stock  one-half.  Such 
new  certificate  shall  represent  as  many  shares 
as  did  the  old  one,  and  each  share  of  the  new 
stock  shall  be  of  the  par  value  of  twenty-five 
dollars." 

This  provision  has  not  been  made  use  of,  but 
instead  an  authorisation  to  increase  the  capital 


MUTUAL  AND  MIXED  COMPANIES  139 

was  obtained.  The  full  authorised  capital  of 
$2,000,000  has  now  been  reached,  and  this  com- 
pany has  been  paying  voluntarily,  and  not  as  a 
matter  of  contract,  large  amounts  in  dividends 
to  industrial  policyholders,  and  has  also  recently 
made  all  whole  life  industrial  policies  terminate 
as  endowments  at  age  80.  It  now  issues  non- 
participating  policies  only,  in  the  ordinary  de- 
partment. 

The  directors  are  elected  by  the  stockholders 
voting  in  person  or  by  proxy,  and  the  policy- 
holders voting  in  person  only,  and  the  following 
qualifications  are  named  for  directors,  viz.: 
That  two-thirds  of  them  must  be  stockholders 
and  one-third  may  be  policyholders. 

Another  company  limits  its  dividend  on  stock 
to  7  per  cent,  per  annum,  plus  the  profits  on  non- 
participating  policies.  There  has  been  estab- 
lished therefrom  a  guaranty  fund  of  $250,000. 
There  is  no  provision  for  the  retirement  of 
stock.  Directors  are  elected  by  the  stockholders 
and  only  a  stockholder  may  be  made  a  director. 

Another  company  limits  its  dividend  on  stock 
to  7  per  cent,  per  annum,  plus  20  per  cent,  of  the 
net  surplus ;  makes  no  provision  for  the  retire- 
ment of  stock ;  provides  for  the  election  of  direc- 
tors by  stockholders  and  policyholders,  voting 
in  person  or  by  proxy,  and  permits  either  a 
stockholder  or  a  policyholder  to  be  made  a  direc- 
tor. 


140  BUSINESS  OF  LIFE  INSURANCE 

Another  does  not  limit  the  dividends  on  stock, 
makes  no  provision  for  its  retirement,  provides 
that  directors  must  be  stockholders  and  be  elect- 
ed by  stockholders  only.  This  company  was 
transferred  in  1899,  from  a  purely  mutual  com- 
pany to  a  stock  company,  as  the  only  means 
under  the  laws  of  New  York  to  change  from  an 
assessment  company  to  a  regular  life  insurance 
company. 

There  are  many  companies  that  come  within 
this  category,  which  have  home  offices  outside 
of  New  York.  The  following  are  examples  of 
the  provisions  of  the  charters  of  some  of  the 
older  and  best  established  of  these  companies. 

One  limits  the  dividend  on  stock  to  10  per 
cent.,  "except  from  the  surplus  or  earnings  from 
the  business  of  accident  life  insurance";  pro- 
vides that  there  shall  not  be  taken  to  be  applied 
toward  this  dividend,  from  the  mutual  or  par- 
ticiiDating  department,  a  greater  amount  than 
$9,000  per  annum;  makes  no  provision  for  re- 
tirement of  stock,  but  provides  that  directors 
must  be  stockholders  and  be  elected  by  stock- 
holders. 

Another  does  not  limit  the  dividends  on  stock, 
makes  no  provision  for  its  retirement,  provides 
that  the  directors  be  elected  by  stockholders  and 
members,  and  names  no  qualification  for  a  direc- 
tor. The  following  is  a  special  provision  of  its 
charter ; 


MUTUAL  AND  MIXED  COMPANIES  141 

"All  persons  making  contracts  with  said  cor- 
poration for  any  of  its  objects  and  purposes 
shall  become  and  be  members  of  said  corpora- 
tion, subject,  however,  to  all  lawful  by-laws, 
rules  and  regulations  which  may  be  made  or  pre- 
sented by  said  directors. ' ' 

The  original  limit  of  stock  in  this  company 
was  $100,000,  which  has  been  increased  by  stock 
dividends  to  $2,000,000.  Although  not  called  for 
by  its  charter  or  by  its  policies,  this  company  has 
for  several  years  been  paying  large  amounts  in 
dividends  to  industrial  policyholders. 

Another  company  does  not  limit  the  dividend 
on  stock,  makes  no  provision  for  its  retirement 
and  provides  that  directors  must  be  stockholders 
and  be  elected  by  stockholders.  Until  recently  it 
transacted  only  a  non-participating  life  busi- 
ness, in  addition  to  a  very  large  accident 
business.  Now  it  issues  participating  policies 
also. 

Another  company,  which  is  also  in  the  bank- 
ing and  trust  company  business,  limits  the  divi- 
dends on  stock,  to  be  derived  from  the  profit  on 
insurance,  as  follows : 

"And  that  all  the  net  profits  to  be  derived 
from  the  business  of  life  insurance,  after  deduct- 
ing the  expenses  of  the  company,  shall  be  di- 
vided pro  rata  among  the  holders  of  the  policies 
of  such  life  insurance,  equitably  and  ratably,  as 
the  directors  of  said  company  shall  and  may, 


142  BUSINESS  OF  LIFE  INSURANCE 

from  time  to  time,  ascertain,  determine  and  re- 
port the  same  for  division." 

In  addition  to  this  charter  provision  there  is 
the  following  regulation  in  the  by-laws : 

"At  the  stated  meetings  of  the  board  in  the 
sixth  and  twelfth  months  of  every  year,  the 
board  may  declare  a  dividend  of  so  much 
of  the  stock  branch  of  the  company  as  they 
shall  judge  expedient,  and  the  same  shall 
be  payable  to  the  stockholders  on  demand; 
but  such  dividends  shall  in  no  case  ex- 
ceed the  amount  of  the  net  profits  then  on 
hand." 

There  is  no  provision  for  the  retirement  of 
the  stock.  Directors  are  elected  by  stockholders 
and  policyholders,  each  voting  in  person  only, 
and  no  qualification  for  a  director  is  named  in 
the  charter. 

Another  company,  which  was  incorporated 
under,  **An  act  to  provide  for  the  incorporation 
of  mutual  insurance  companies,  for  the  insur- 
ance of  lives  or  health  of  individuals,  or  against 
accidents  to  them,"  notwithstanding  the  word 
** mutual"  in  the  title  to  the  act,  does  not  limit 
its  dividends  on  stock,  makes  no  provision  for 
its  retirement,  and  provides  that  its  directors 
must  be  stockholders  and  elected  by  stockhold- 
ers. 

Another  does  not  limit  the  dividends  on  stock, 
makes  no  provision  fc]  lotirement  of  the  same, 


MUTUAL  AND  MIXED  COMPANIES  143 

provides  that  directors  must  be  stockholders 
and  be  elected  by  stockholders. 

Another  does  not  limit  the  dividends  on  stock 
except  that  from  the  surplus  each  year  an 
amount  equal  to  2  per  cent,  of  the  reserve  is  to 
be  set  aside  until  the  accumulated  surplus  equals 
66  2-3  per  cent,  of  the  reserve.  There  is  a  pro- 
vision for  retiring  the  capital  stock  when  a  ''ma- 
jority in  interest"  of  the  policyholders  make 
application,  and  a  like  majority  of  the  stock- 
holders shall  consent.  The  directors  must  be 
stockholders  and  are  elected  by  stockholders  so 
long  as  the  stock  is  not  retired. 

Another  limits  the  dividend  on  stock  to  7  per 
cent.,  with  the  further  provision  that  every  three 
years  one-eighth  of  the  net  surplus  of  the  period 
shall  be  ascertained  and  be  paid  to  the  stock- 
holders. There  is  no  provision  for  the  retire- 
ment of  stock  and  there  is  the  following  special 
provision  in  the  charter : 

"And  be  it  enacted  that  the  capital  of  the  com- 
pany maj'  be  increased  indefinitely  by  the  accu- 
mulation of  profits  and  be  invested  over  and 
above  the  said  one  hundred  thousand  dollars  in 
real  and  personal  property  in  the  manner  and  at 
the  times  determined  upon  by  the  said  Board  of 
Directors." 

The  foregoing  embrace  most  of  the  older  and 
larger  companies,  classed  as  mutual  companies 
with  guaranty  capital,  and  as  mixed  companies, 


144  BUSINESS  OF  LIFE  INSUBANCE 

i.  e.,  stock  companies,  issuing  participating  poli- 
cies. It  will  not  have  escaped  notice  that,  aside 
from  the  one  characteristic  of  a  mutual  com- 
pany with  guaranty  capital,  viz.,  the  interest 
of  the  stock  absolutely  limited  to  a  fixed  rate  of 
dividend,  the  two  classes  of  companies  are 
scarcely  distinguishable.  There  are  to  be  found 
in  each  class  companies  that  provide  for  retire- 
ment of  stock  and  companies  that  do  not,  com- 
panies that  permit  policyholders  to  vote  and 
companies  that  do  not,  companies  that  permit 
policyholders  to  be  directors  and  companies  that 
do  not. 

In  earlier  days  more  of  these  companies  were 
mutual  with  guaranty  capital.  Of  these  many  be- 
came purely  mutual,  but  some  have  not,  so  little 
have  the  policyholders  cared  about  it  or  so  little 
real  opportunity  has  been  given  for  them  to  ex- 
press their  will,  or  both.  In  earlier  years,  too, 
mixed  companies  made  more  or  less  definite  pro- 
visions about  the  sharing  of  profits  between 
policyholders  and  stockholders.  Then  mutuality 
was  believed  in,  and  some  concession  had  to  be 
made.  Now  it  is  otherwise.  Of  the  companies 
organised  within  twenty-five  years,  of  which 
very  few  have  been  mentioned,  almost  all  have 
been  mixed  companies  which  did  not  limit  their 
stock  dividends  by  charter  aud  did  not  give  the 
policyholders  a  right  to  vote.  Neither  omission 
attracted  any  especial  notice. 


MUTUAL  AND  MIXED  COMPANIES  145 

Perhaps  the  presence  of  a  provision  like  the 
following  in  the  applications  or  policies  of  very 
many  of  the  companies,  whether  purely  mutual 
or  with  stock  capital,  may  account  for  it  in  part : 

'  *  In  any  distribution  of  surplus  or  apportion- 
ment of  profits  the  principles  and  methods  which 
may  be  adopted  by  the  company  for  such  distri- 
bution to  this  policy  shall  be  conclusive  upon  the 
insured  and  upon  all  parties  having  or  claiming 
any  interest  under  this  policy.** 

If  the  policyholder  must  take  what  is  given 
him  and  ask  no  questions,  he  may  well  conclude 
that  whether  one  set  of  men  may  arbitrarily  ap- 
portion this,  or  another  set  of  men,  is  of  little 
consequence  to  him.  This  view,  likewise,  re- 
ceives confirmation  if  one  of  his  policies  in  a 
mixed  company  pays  dividends  at  least  as  good 
as  in  a  purely  mutual  company,  which  is  fre- 
quently the  experience. 

And  the  fact  that  he  finds  that  he  is  given 
about  as  much  invitation  to  exercise  an  effective 
influence  in  a  mixed  company,  even  when  only 
stockholders  elect  directors,  as  in  mutual  com- 
panies which  take  great  pains  not  to  render  his 
vote  easy  to  cast,  or  of  much  importance  if  cast, 
is  certainly  not  without  effect  upon  the  opinion 
of  the  average  man,  which  is,  tersely  put,  that  in 
ordinary  times  mixed  companies  are  about  as 
mutual  as  any. 

It  is  aflSnned,  with  much  reason,  that  the  pel- 


146  BUSINESS  OF  LIFE  INSURANCE 

icyholders'  interests  in  a  mixed  company  are 
more  likely  to  be  safeguarded  by  the  stockhold- 
ers than  in  a  mutual  company  with  guaranty 
capital,  because  in  the  former  the  stock  can  earn 
better  dividends  only  by  increasing  also  the  re- 
turns to  policyholders,  and,  on  this  ground,  it  is 
argued  that  in  a  mixed  company  the  stock- 
holders may  fairly  be  trusted  with  complete  con- 
trol, but  only  with  partial  control  in  mutual  com- 
panies with  guaranty  capital,  where  profits  be- 
yond the  fixed  dividend  can  be  secured  by  the 
Btockholders  only  by  indirect  means  and  pre- 
sumably without  benefit  to  the  policyholders. 

In  other  countries  the  respective  interests  of 
Btockholders  and  policyholders  are  usually  very 
clearly  defined,  as  indeed  they  were  in  all  early 
charters  here.  But  the  declaration  of  dividends 
at  the  end  of  policy  years,  instead  of  closely 
dividing  the  surplus  at  the  expiration  of  certain 
periods,  has  prevented  the  average  American 
policyholder  from  forming  any  clear  conception 
of  what  is  really  done  with  the  year's  surplus, 
and  therefore  indifferent. 


CHAPTER  XVI 

AN  ANALYSIS  OP  AGENCY  SYSTEMS 

The  first  company  to  be  established  to  furnish 
life  insurance  on  a  level  premium  plan,  the  * '  Old 
Equitable,"  of  London,  has  never  employed  an 
agent,  upon  salary  or  otherwise,  or  paid  a  com- 
mission. Notwithstanding  this,  the  company 
has  been  very  successful,  especially  in  regard  to 
returns  to  policyholders,  and  has  grown  slowly 
but  surely.  It  now  holds  assets  of  about  $25,- 
000,000.  But  the  amount  of  new  business  is  very 
small,  as  witnessed  the  following  record  for  the 
last  five  years  of  new  insurance  issued : 

1900 $1,347,240 

1901 1,087,850 

1902 1,087,165 

1903 1,110,320 

1904 1,284,250 

Even  though  such  a  business  be  successful 
from  the  standpoint  of  the  policyholders,  it  must 
be  acknowledged  that  it  falls  far  short  of  success 

147 


148  BUSINESS  OF  LIFE  INSURANCE 

from  the  standpoint  of  enlisting  the  patronage 
which  life  insurance  desei*ves.  Indeed,  it  indi- 
cates that,  were  no  propaganda  employed,  the 
benefits  of  life  insurance  would  be  confined  to 
very  few.  It  is  the  sort  of  success  which  an  asso- 
ciation of  consumers  of  coal  might  be,  for  the 
few  who  act  on  their  own  initiative  and  with 
ample  means  to  take  advantage  of  large  pur- 
chases in  advance  of  actual  needs,  while  the  or- 
dinary man,  living  up  to  his  income  and  wanting 
in  prudence  and  initiative,  could  not  be  benefited 
by  it  and  much  less  the  great  mass  of  men  and 
the  very  poor.  There  would  still  be  need  for  the 
dealer  who  sells  his  coal  by  the  ton  and  even  by 
the  basket,  and  precisely  in  the  same  way  the 
success  of  life  insurance  consists  not  merely  in 
the  economical  conduct  of  a  company  for  the 
few  who  seek  its  benefits  on  their  own  initiative, 
but  also  in  the  extension  of  the  benefits  of  life 
insurance  to  all  who  have  need  for  them,  on  as 
favourable  terms  as  possible. 

It  may  be  possible  to  harmonise  these  require- 
ments, however,  as  we  shall  see. 

The  payment  of  commissions,  upon  which  the 
agency  system  was  later  established,  was  intro- 
duced in  the  form  of  a  secret  or  at  least  private 
arrangement  with  the  applicant's  solicitor  or 
financial  adviser.  It  was  perilously  near  to  a 
bribe,  and,  while  in  most  cases  harmless  enough, 
must  on  some  occasions  have  caused  the  betrayal 


ANALYSIS  OF  AGENCY  SYSTEMS  149 

of  the  client's  interests.  The  British  Parliament 
has  been  busy  in  recent  years  with  legislation  to 
penalise  the  payment  and  acceptance  of  commis- 
sions by  an  attorney,  banker  or  other  agent  or 
employee  of  the  applicant,  without  full  notice  to 
the  latter.  The  following,  from  '*A  Compara- 
tive View  of  the  Various  Institutions  for  the  As- 
surance of  Lives,"  by  Charles  Babbage,  1826, 
shows  what  was  thought  of  the  practice  in  the 
early  days : 

*'Few  persons  effect  assurances  on  their  lives 
without  previously  consulting  either  their  solici- 
tor, their  agent,  their  broker,  or  some  other  per- 
son on  whose  judgment  and  integrity  they  im- 
agine they  can  rely.  It  is  therefore  of  the  utmost 
consequence  that  no  motive  should  sbe  presented 
to  those  who  are  thus  confidentially  employed, 
which  should  induce  them,  from  any  prospect  of 
advantage  to  themselves,  to  recommend  one 
office  in  preference  to  others.  That  such  a  mo- 
tive is  constantly  held  out,  and  the  temptation 
most  frequently  accepted,  is  established  by  too 
many  proofs  to  be  denied,  and  the  frequency  of 
its  occurrence  is  unfortunately  so  great  as  to 
cause  it  in  some  measure  to  have  lost,  in  the  eyes 
of  those  who  practise  it,  the  disgrace  which  in 
all  other  transactions  is  attached  to  the  offer  or 
the  acceptance  of  a  bribe.  *  *  *  Let  us  now 
suppose  the  consumer,  doubtful  of  his  judgment, 
employs  an  agent  of  his  own;  it  will  never  be 


150  BUSINESS  OF  LIFE  INSURANCE 

contended  that  an  individual  or  a  body  of  men 
can,  with  any  semblance  either  of  justice  or  in- 
tegrity, offer  to  those  agents  a  premium  to  buy 
at  their  particular  establishments  the  article 
they  are  instructed  to  purchase.  If  such  a  prin- 
ciple is  once  admitted,  those  who  sell  the  worst 
goods  will  both  find  it  necessary,  and  be  able,  to 
offer  the  highest  premium  for  a  breach  of  trust 
in  the  consumer's  agent.  Yet  this  is  precisely 
the  conduct  of  almost  all  the  assurance  compa- 
nies; some  of  them  unblushingly  offer,  even  in 
the  statement  of  their  terms,  and  most  of  them 
privately  pay,  what  they  call  a  commission  to 
those  persons  who  bring  assurances  to  their 
office. ' ' 

Even  when  life  insurance  agencies  came  to  be 
acknowledged  openly,  it  was  rare  for  a  long  time 
that  anybody  devoted  to  this  work  his  whole 
time  and  energy.  It  is  now  generally  recognised 
that  only  persons  who  make  it  their  sole  voca- 
tion succeed  in  it,  and  men  are  carefully  trained 
for  it  who  expect  to  make  of  it  a  life  work. 

The  compensation  provided  for  in  the  agree- 
ments originally  made  with  intermediaries  was 
usually  a  percentage  commission  upon  each  pre- 
mium paid — five  per  cent,  being  the  maximum. 
This  was,  of  course,  very  well  when  the  commis- 
sion was  going  to  a  lawyer  who  had  other  means 
of  livelihood  and  also  for  placing  an  insurance 
which  had  been  determined  upon  already,  but 


ANALYSIS  OF  AGENCY  SYSTEMS  151 

when  men  took  up  the  work  who  depended  upon 
it  as  a  means  of  livelihood  that  was  altogether 
another  matter. 

Notwithstanding,  the  first  contracts  with  life 
insurance  agents  were  of  this  type.  They  were 
taken,  however,  by  men  who  had  other  occupa- 
tions also,  or  independent  incomes  otherwise, 
and  who  saw  in  this  a  means  for  permanently 
augmenting  these  incomes.  At  first,  therefore, 
even  when  life  insurance  agencies  began  to  de- 
velop, soliciting  was,  because  of  the  mode  of  re- 
muneration, an  occupation  in  which  only  persons 
of  means  or  persons  otherwise  employed  in  part 
could  engage.  It  would  have  meant  much  for 
the  dignity  of  the  occupation  during  some  of  the 
years  of  its  development,  had  this  continued  to 
be  the  case,  but  the  present  state  of  efficiency 
could  hardly  have  been  attained. 

The  change  from  the  original  mode  of  re- 
muneration came  about  in  three  ways,  viz. : 

First.  The  payment  of  fixed  or  contingent 
salaries,  or  both,  to  agents  who  went  about  ap- 
pointing and  supervising  other  agents  and  inci- 
dentally procuring  applications. 

Second.  Advancing  sums  of  money  upon  ap- 
plication, against  renewal  commissions  receiva- 
ble in  future,  or  purchasing  the  same  outright. 
The  life  insurance  companies,  being  accustomed 
to  deal  in  annuities,  contingent  upon  survival, 
very  naturally  fell  into  this  practice.    The  loans 


152  BUSINESS  OF  LIFE  INSURANCE 

or  commutations,  as  the  case  might  be,  were 
treated  as  good  assets. 

Third.  Increasing  the  commission  for  the 
first  year,  at  the  same  time  decreasing  the  re- 
newal commission  or  even  without  doing  so.  In 
such  case,  the  first  commission  was  at  first  kept 
below  the  amount  of  "loading"  which  had  been 
fixed  at  and  continued  to  be  the  same  percentage 
of  the  first  premium  and  of  each  renewal  pre- 
mium. 

The  first  of  these  methods  proved  least  effec- 
tive and  most  wasteful.  It  did  not  reward  on  a 
quam  meruit  basis  and  too  often  but  little  actual 
service  was  obtained.  Moreover,  it  was  subject 
to  the  disadvantage  that  the  cost  had  little  refer- 
ence to  the  provision  in  the  premiums  for  ex- 
pense purposes. 

The  second  did  not  help  much  to  meet  the  re- 
quirements of  new  agents.  The  company  would 
not  lend  or  purchase  renewal  commissions  until 
the  policies  were  in  force.  On  the  other  hand, 
the  agent  required  to  be  more  amply  rewarded 
as  soon  as  the  insurance  was  effected. 

Consequently,  the  third  method  soon  distanced 
the  others,  though  it  did  not  exclude  them,  and, 
in  fact,  was  often  accompanied  by  one  or  both  of 
them.  Under  this  system  the  great  life  insur- 
ance companies  were  built  up  originally.  A  com- 
pany would  divide  up  its  field  into  general  agen- 
cies, its  contract  running  to  the  general  agent, 


ANALYSIS  OF  AGENCY  SYSTEMS  153 

who  would  then  make  arrangements  with  resi- 
dent agents  and  travelling  agents,  remunerating 
them  as  he  saw  fit. 

Competition  between  companies  drove  com- 
missions in  several  of  them  up  to  the  highest 
point  within  these  limitations  and  also  loaded 
some  of  them  with  advances  against  renewal 
commissions  and  commuted  values  of  the  same, 
of  very  doubtful  worth,  owing  to  the  poor  qual- 
ity of  the  business  secured.  The  disappointment 
of  the  policyholders  with  the  diminishing  re- 
turns in  annual  dividends  also  made  it  harder  to 
sell  life  insurance,  which  had  previously  been 
issued  chiefly,  though  by  no  means  exclusively, 
on  the  whole  life  plan. 

^  While  affairs  were  in  this  situation,  there  be- 
gan to  be  failures  of  companies,  due  to  bad  in- 
vestments and  worse  business  methods,  and  then 
came  the  panic  of  1873,  carrying  down  many 
others,  promptly  or  after  some  years  of  strug- 
gle. The  amount  of  life  insurance  in  force  in 
the  regular  companies  fell  one-half  in  less  than 
ten  years.  Much  of  this  went  to  assessment  and 
fraternal  societies,  which,  though  on  unsound 
plans,  attracted  those  who  desired  protection 
only. 

Then  deferred  dividend  plans  were  intro- 
duced, which,  by  means  of  giving  the  returns 
only  to  persistent  survivors,  promised  endow- 
ment results  at  the  end  of  ten,  fifteen  or  twenty 


154  BUSINESS  OF  LIFE  INSURANCE 

years  in  return  for  life  or  limited  payment  life 
premiums,  and  whicli  both  furnished  an  accumu- 
lated surplus  that  could  be  advanced  without 
impairing  the  reserve  in  excess  of  commissions 
over  the  loading  on  first  premiums  and  also — 
which  was  not  at  first  apprehended — afforded 
concealment  for  the  advance. 

This  plan,  with  its  attractions  for  investors, 
together  with  the  hard  times  which  had  brought 
many  bright  business  men  to  ruin,  caused  men 
of  enterprise  to  take  up  life  insurance  agency 
work  as  a  promising  vocation.  These  compa- 
nies, accordingly,  soon  outstripped  the  others  in 
the  race  for  new  business. 

One  of  them  introduced  a  complete  departure 
from  the  old  limitations  upon  first  commissions, 
in  the  following  manner:  It  made  a  contract, 
calling  for  the  largest  first  commission  that  the 
loading  and  the  other  margins  on  the  first  year 's 
premium  would  allow,  and  also  for  renewal  com- 
missions, and  then  stipulated  that  it  would  ad- 
vance at  once  a  liberal  percentage  against  the 
renewal  commissions.  This  gave,  in  effect,  a 
first  commission  in  excess  of  the  entire  provi- 
sion for  expense  in  the  first  premium.  Before 
this  there  had  been  excess  in  this  regard,  but 
now  first  commissions  were  made  about  50  per 
cent,  higher. 

It  was  not  long  before  agents  could  have  their 
choice  between  a  large  ''brokerage"  coromission 


ANALYSIS  OF  AGENCY  SYSTEMS  155 

or  a  smaller  first  year's  commission  with  a  re- 
newal interest.  The  subterfuge  of  putting  the 
former  as,  in  part,  an  advance  against  or  a  com- 
mutation of  renewal  commissions,  was  some- 
times employed,  but  often  neglected.  All  idea 
of  a  limitation  was  abandoned  by  some  compa- 
nies, and,  indeed,  no  clear  conception  of  a  proper 
limitation  has  yet  been  agreed  upon.  Naturally 
the  effect  was  demoralising.  It  is  not  too  much 
to  say  that  in  some  companies  the  limit  has  been 
every  cent  that  could  be  expended  without  ren- 
dering themselves  insolvent  and  with  utter  dis- 
regard for  the  rights  of  policyholders  to  accu- 
mulated surplus — in  effect  changing  policies 
with  participating  premiums  into  non-partici- 
pating insurances. 

Under  the  general  agency  system,  an  attempt 
was  made  to  put  the  general  agent  between  the 
company  and  the  soliciting  agent,  requiring  the 
former  to  furnish  the  funds  for  the  excess  brok- 
erage commissions  of  the  latter.  This  attempt 
was  usually  ineffectual,  the  general  agent  re- 
quiring to  borrow  this  money  from  the  company 
against  his  renewal  commissions  or  even  hold- 
ing out  for  increased  commissions  or  bonuses  to 
cover  it.  The  efforts  to  shift  the  burden  merely 
made  the  system  more  costly. 

Many  general  agents  were  financially  ruined, 
however;  yet  others  were  ruined  in  health  by 
the  pressure  and  strain.     But  those  who  by 


156   BUSINESS  OF  LIFE  INSURANCE 

shrewdness  and  perseverance  won  in  this  specu- 
lation often  had  rich  prizes  at  the  end — incomes 
of  $50,000  or  even  $100,000  or  more  per  annum. 
There  were,  in  regard  to  one  company,  great 
scandals  over  loans  to  certain  agents — as,  for 
instance,  more  than  $500,000  to  one  firm ;  the  re- 
newal commissions  paid  that  debt  completely, 
and  from  the  margins  above  an  estate  of  almost 
$1,000,000  was  accumulated,  it  is  said. 

The  wastefulness  of  this  system — especially 
when  over-large  fields  were  assigned — has  been 
recognised  more  recently,  and  now  there  are 
three  systems  on  trial  to  succeed  it,  viz. : 

The  direct  agency  system,  each  agent  having 
a  direct  contract  with  the  company,  reporting 
directly  or  to  a  cashier  of  the  company  and 
supervised  by  an  appointee  on  salary  or  with  a 
contingent,  overriding  first  year's  commission. 

The  general  agent  system,  with  small  fields 
allotted. 

The  brokerage  system,  with  direct  contracts, 
company  cashiers  and  an  open  field. 

The  first  of  these  has  so  far  proved  the  most 
effective,  the  last  the  most  expensive,  so  far  as 
can  be  told  from  the  reports  to  the  departments. 
The  second,  as  carried  out  by  some  companies, 
seems  to  be  both  economical  and  reasonably 
effective,  but  in  other  companies  has  been  most 
wasteful. 

The  worst  feature  has  been  the  want  of  a  cri- 


ANALYSIS  OF  AGENCY  SYSTEMS  157 

terion  by  which  to  measure  the  economy  or  the 
efficiency. 

The  companies  engaged  in  the  industrial  in- 
surance business,  collecting  small  weekly  pre- 
miums, appear  to  have  solved  the  problem  of 
securing  effectual  service  in  obtaining  new  ap- 
plicants at  a  minimum  cost.  They,  of  course,  do 
incur  much  larger  expense  in  collecting  renewal 
premiums.  But  for  this  compensation  they  also 
require  the  agent  to  make  good  all  losses  of  pre- 
miums by  lapse  before  he  is  entitled  to  any  com- 
mission for  new  business.  For  any  excess  of 
new  premiums  over  lapsed  premiums  they  pay 
liberally ;  but  on  the  whole  the  cost  of  new  busi- 
ness is  low  with  them,  and  the  companies  that 
transact  a  business  with  annual  premiums 
might  imitate  their  system  to  advantage. 

In  the  beginning  of  this  chapter  the  ''Old 
Equitable"  was  cited  as  one  extreme  in 
the  matter  of  agency  expenditures,  viz., 
none  at  all,  and  reference  was  made  to  the 
very  small  new  business  transacted.  It  might 
be  supposed  that  the  other  extreme  would 
necessarily  be  the  company  transacting  the 
largest  new  business,  but  such  is  not  the  case. 
In  the  British  empire,  for  instance,  the  company 
securing  the  largest  volume  of  new  insurance 
pays  only  a  small  brokerage  commission  under 
direct  contracts  and  with  no  renewal  commis- 
sions.   Its  system  is  admirably  economical  and 


158  BUSINESS  OF  LIFE  INSURANCE 

wonderfully  effectual.  Tlie  other  extreme  is 
really  found  in  companies  which  pay  extrava- 
gantly for  new  business  and  still  secure  but  little 
and  that  little  of  poor  quality  and  short  dura- 
tion. 


CHAPTER  XVn 

PROVISION   FOR  EXPENSES — ANOMALIES  IN   LOADING 

There  was  no  express  provision  for  expense 
in  the  first  premiums  of  the  ''Old  Equitable." 
Very  little  expense  was  incurred,  in  fact,  and 
fortunately  the  assumptions  as  to  mortality  and 
interest  were  so  conservative  as  to  provide  lib- 
eral margins.  When  a  change  was  made  from 
Simpson's  London  table  to  the  Northampton 
table,  the  management  found  the  reduction  of 
the  premiums  so  considerable  that  they  put  on  a 
"loading"  of  10  per  cent.,  but  this  was  taken  off 
after  experience  had  shown  it  to  be  unnecessary. 

From  that  time,  however,  until  about  a  quar- 
ter century  ago — fully  100  years — the  gross  or 
office  premiums,  actually  demanded  by  regular 
life  insurance  companies,  were  always  computed 
in  the  following  fashion:  The  level  net  pre- 
mium, according  to  the  mortality  table  and  rate 
of  interest  assumed,  was  first,  calculated.  To 
this  was  added  a  level  "loading,"  i.  e.,  the  same 
amount  each  year,  making  the  total  gross  or 
office  premium  level  also. 

1K» 


160  BUSINESS  OF  LIFE  INSURANCE 

Manifestly  this  answered  very  well,  so  long  as 
nothing  was  paid  for  introducing  new  insur- 
ances and  also  so  long  as  commissions  were  paid 
only  in  the  form  of  a  small  percentage  upon  each 
premium.  But,  as  soon  as  enterprising  efforts 
for  business  were  indulged  in,  the  inapplicabil- 
ity of  this  system  was  or  ought  to  have  been  evi- 
dent. When,  in  order  to  obtain  agents,  compa- 
nies had  first  to  promise  loans  against  renewal 
commissions  and  later  to  pay,  in  salaries,  ad- 
vances or  commissions,  more  than  the  loading 
upon  the  new  premiums,  there  was  occasion  for 
a  change  of  system. 

Gonserv^atism  fought  against  a  change.  One 
company  would  oppose  it  in  the  fear  that  com- 
missions yet  larger  would  then  be  paid ;  another 
because  to  square  the  theory  with  the  facts 
would  perhaps  encourage  setting  up  new  com- 
panies and  enable  smaller  and  weaker  compa- 
nies to  compete. 

The  need  for  a  change  of  basis  was  earliest 
seen  in  Germany,  where  Dr.  A.  Zillmer,  a  fa- 
mous actuary,  discovered  that  as  to  whole  life 
policies  with  premiums  for  life — then  much  the 
most  popular  form — the  first  year  death-losses, 
contribution  to  expense  of  management  and  in- 
itial cost,  i.  e.,  commission,  medical  examiner's 
fee,  etc.,  absorbed  the  whole  first  premium.  He 
proposed,  therefore,  that  a  system  of  loading  be 
employed  as  follows:     Allow  the  whole  first 


PROVISION  FOR   EXPENSES      161 

year's  premium  for  mortality  and  expense. 
Compute  the  level  net  premium  at  an  age  one 
year  higher.  He  made  the  point,  however,  that 
not  so  large  a  provision  for  initial  expenses  is 
needed  or  should  be  made  in  the  case  of  limited 
paj'ment  and  endowment  insurance. 

Leading  actuaries  in  many  countries  have  en- 
dorsed this  method  as  reasonable  and  fair, 
among  them  the  greatest  living  British  actuary, 
Dr.  Thomas  Bond  Sprague,  and  the  greatest  liv- 
ing American  actuary,  Emory  McClintock.  It 
has  been  made  use  of  by  many  companies  in  per- 
haps all  countries  where  life  insurance  has  been 
successful. 

In  some  countries  other  methods  more  or  less 
arbitrary  or  at  least  empirical  have  been  em- 
ployed to  produce  a  like  result.  As,  for  instance, 
in  France,  where  an  attempt  was  made  to  deter- 
mine scientifically  the  amounts  and  the  inci- 
dence of  expense  requirements  of  various  sorts 
and  to  load  so  as  to  provide  funds  to  meet  them 
as  they  are  incurred.  Or  Sweden,  where  by  law 
initial  expenses  in  excess  of  the  first  year's  level 
loading  were  allowed  by  law,  as  an  asset,  to  the 
amount  of  $15.00  per  $1,000  insured,  to  be  made 
good  within  five  years 

In  Great  Britain,  even  as  to  companies  which 
did  not  employ  Dr.  Zillmer's  device,  known  as 
"preliminary  term,"  the  agitation  of  the  sub- 
ject caused  the  actuaries  to  give  attention  to  the 


162   BUSINESS  OF  LIFE  INSURANCE 

adequacy  of  "loading"  from  a  mathematical 
standpoint.  Accordingly  a  special  level  loading 
was  put  upon  the  premiums,  equivalent  in  pres- 
ent value  to  $10.00  or  $15.00  per  $1,000  insured. 
This  made  the  gross  or  office  premium  large 
enough  to  provide  for  an  excess  of  initial  ex- 
penses by  that  much,  but  did  not  set  free  the 
funds  at  the  outset  for  this  use. 

These  actuaries  would  have  been  loud  in  de- 
nunciation of  an  actuary  who  had  dealt  thus  with 
a  provision  to  meet  losses,  i.  e.,  had  computed 
the  premiums  so  as  to  be  mathematically  equiva- 
lent in  present  value  to  the  claims  payable,  but 
not  so  as  to  enable  these  claims  to  be  met  when 
incurred.  Their  procedure  in  regard  to  initial 
expenses  is  equally  illogical  and  would  have 
seemed  so,  inevitably,  had  not  the  system  of 
loading  been  reputable  because  intrenched,  be- 
fore the  problem  was  even  thought  of. 

The  ' '  preliminary  term ' '  method  of  providing 
for  initial  expenses  began  to  be  used  in  the 
United  States  by  regular  life  insurance  com- 
panies about  ten  years  ago.  A  few  of  the  com- 
panies already  in  existence  adopted  it  and  near- 
ly all  the  new  companies  have  done  so,  until  now 
about  half  of  them  in  number  seek  in  this  man- 
ner to  provide  for  cost  of  new  business  as  the 
same  is  incurred. 

There  have  been  some  abuses.  Many  of  the 
companies  have  disregarded  Dr.  Zillmer's  con- 


PROVISION   FOR   EXPENSES      163 

servative  limitation  of  the  preliminary  term 
provision,  ?'.  e.,  to  the  amount  of  the  ordinary  life 
premium,  putting  up  some  reserve  the  first  year 
out  of  higher  premiums,  which,  by  the  bye,  was 
insisted  upon  also  by  Dr.  Sprague  and  Mr.  Mc- 
Clintock ;  the  pace  set  by  older  and  larger  com- 
panies rendered  strict  adherence  to  those  limits 
difficult  and  onerous.  A  few  applied  the  device 
most  unconscionably  to  so-called  ** bonds,"  pur- 
porting to  be  investments  and  scarcely  involving 
insurance  at  all.  Two  or  three  others  have  open- 
ly or  surreptitiously  taken  the  first  two  pre- 
miums for  current  expense  and  losses — a  prac- 
tice that  seems  indefensible  when  the  purpose  of 
this  method  of  ''loading"  is  to  provide  commis- 
sions upon  the  first  year's  premium  only. 

All  the  foregoing  relates  only  to  differences 
between  the  practices  of  different  companies  in 
''loading"  premiums  for  the  same  kinds  of  poli- 
cies. Custom,  growing  out  of  conceptions  of 
business  requirements,  has  caused  even  greater 
and  more  glaring  anomalies  to  creep  into  the 
"loading"  of  the  premiums  for  different  forms 
of  policies  in  the  same  company.  These  anom- 
alies are  usually  to  be  found  in  the  premiums 
of  practically  all  the  companies. 

First,  as  between  whole  life  premiums  and 
limited  payment  life  premiums.  The  insured  is 
purchasing  identically  the  same  insurance  under 
either  form;  the  sole  difference  is  in  the  mode 


164   BUSINESS  OF  LIFE  INSURANCE 

or  term  of  payment.  The  premiums  ought,  there- 
fore, fairly  to  be  equivalent  mathematically.  The 
net  premiums  are,  of  course;  for  their  present 
values  are  precisely  equal.  If  the  ''loadings" 
were  equivalent,  then  the  gross  or  office  pre- 
miums would  also  be  equivalent.  But  are  they? 
The  following  shows  the  "loadings"  on  the  pre- 
miums indicated  and  their  present  values : 

Loadings    and   Present    Values    of    Loadings. 
Age,  21.  American  Experience  and  3  per  cent. 


, 

—Loading ^ 

Plan. 

Annual. 

Present  value. 

Life 

.$4.90 

$111.76 

Life, 

20  Payment.. 

.   6.36 

90.94 

Life, 

15  Payment.. 

.  7.25 

84.65 

Life, 

10  Pavment.. 

.  9.04 

76.78 

The  foregoing  are  from  the  rates  of  premium 
of  one  of  the  most  important  companies;  the 
''loading"  of  the  premiums  of  most  companies 
is  similarly  unequal. 

According  to  the  practice  of  American  com- 
panies, the  annual  loading  in  each  case  is  treated 
as  earned  as  soon  as  it  is  received.  This  seems  to 
charge  the  limited  payment  policies  unfairly  for 
current  expenses ;  and,  indeed,  they  are  at  a  dis- 
advantage until  after  the  payment  period  is 
completed.  Then,  with  no  loading  to  pay  their 
portion  of  the  expense,  they  become  a  burden 
upon  other  policies  or  are  mulcted  by  apply- 


PROVISION  FOR   EXPENSES      165 

ing  the  surplus  derived  from  interest  or  mor- 
tality. 

In  some  of  the  other  countries  the  extra  load- 
ing on  limited  pajTnent  life  policies  is  reserved 
during  the  pajment  period  and  released  year  by 
year  after  that  period  has  closed,  to  meet  the 
policy's  share  of  current  expenses. 

Yet  greater  anomalies  are  apparent  in  the 
loading  of  endowment  premiums,  as  appears 
from  the  following  comparisons  from  the  pre- 
miums of  the  same  company : 

Loadings    and   Present   Values    of    Loadings. 
Age,  21.  American  Experience  and  3  per  cent. 


-Loading- 


Plan.  Annual.  Present  value. 

Life $4.90  $111.76 

Endowment,  20  years...  9.20  131.55 

Endowment,  in  15  years.11.87  138.59 

Endowment,  in  10  years.17.23  146.34 

Business  exigencies  and  requirements  are  the 
excuse  for  these  inequalities.  No  more  insur- 
ance, even  during  the  term,  is  supplied  by  an 
endowment  insurance  than  by  a  whole  life  in- 
surance; indeed,  not  so  much  actual  insurance 
above  the  reserve  which  in  an  endowment  policy 
equals  the  sum  insured  at  the  end  of  the  period. 
A  larger  loading  than  on  the  life  policy  handi- 
caps the  investment,  is  a  direct  burden  upon  it 


166  BUSINESS  OF  LIFE  INSURANCE 

and  really  a  deduction  from  money  paid  to  the 
company  for  investment  purposes  only. 

It  reaches  the  extreme  of  absurdity  in  the 
loading  of  the  ten-year  endowment  premium, 
which  at  this  age  is  actually  nearly  as  much  as 
the  entire  whole  life  premium  at  the  same  age, 
$19.62,  and  the  present  value  of  which  exceeds 
the  present  value  of  all  the  loading  which  a 
whole  life  policy  issued  at  the  same  age 
would  contribute  throughout  its  entire  exist- 
ence. 

To  look  at  the  matter  another  way,  consider 
two  cases.  Two  men,  aged  21,  purchase  policies 
of  the  same  company :  one  a  ten-year  endowment 
policy  for  $10,000,  with  a  premium  of  $1,058.40 ; 
the  other  a  whole  life  policy  for  a  like  amount, 
with  a  premium  of  $196.20.  The  latter  invests 
the  difference  in  premiums,  $862.20,  each  year, 
at  3|  per  cent,  interest,  compounded  annually. 
In  event  of  his  death  his  policy  is  paid  and  his 
dependents  also  have  the  accumulation  of  his 
investment.  At  the  end  of  ten  years  the  two 
stand  as  follows : 

The  endowment  policyholder. — Insured  for 
ten  years  for  $10,000.  Guaranteed  at  end  of  ten 
years  $10,000.    Surplus,  perhaps,  $1,000. 

The  life  policyholder. — Insured  for  ten  years 
for  $10,000.  Also  with  investment  worth  at  the 
end  of  each  year  (and  available  in  event  of 
death)  as  follows : 


PROVISION  FOR   EXPENSES      167 

End  of  first  year,  $892.38 ;  end  of  second  year, 
$1,815.96;  end  of  third  year,  $2,771.88;  end  of 
fourth  year,  $3,761.35;  end  of  fifth  year,  $4,785.- 
38 ;  end  of  sixth  year,  $5,845.20 ;  end  of  seventh 
year,  $6,942.17;  end  of  eighth  year,  $8,077.52; 
end  of  ninth  year,  $9,252.61 ;  end  of  tenth  year, 
$10,468.83. 

Guaranteed  at  the  end  of  ten  years :  On  life 
policy,  $849.10  reserve;  on  investment,  $10,- 
468.83.  Total  guaranteed,  $11,317.93.  Surplus 
on  life  policy,  perhaps,  $400.    Total,  $11,717.93. 

Singularly  enough,  even  in  companies  which 
assail  the  attempt  to  accommodate  the  first  year 
loading  to  the  requirements  of  initial  cost  by 
means  of  ''preliminary  term,'*  flagrant  dis- 
criminations, such  as  this,  are  practised,  literally 
without  a  thought  of  their  inconsistency  and 
injustice. 


CHAPTER  XVni 

WHEN"    IS    NEW   BUSINESS   PROFITABLE  ? 

In  a  stock  company  with  all  the  profits  going 
to  the  stockholders  it  ought  not  to  be  difficult  to 
answer  the  question:  Wlien  is  new  business 
profitable?  Obviously  the  failure  or  success  of 
the  company  depends  upon  its  being  answered 
correctly  also.  But  that  it  is  not  so  easy  to  solve 
is  indicated  by  the  following  facts : 

The  ''Old  Equitable"  found  stock  companies 
demanding  5  per  cent,  per  annum  for  five  and 
seven  year  term  policies.  Even  these  earlier 
premiums,  high  as  they  are,  did  not  allow  profit 
enough  for  them.  Most  of  them  had  done  but 
little  business  comparatively  and  at  as  high 
rates  as  could  be  secured. 

In  the  United  States  there  were  stock  com- 
panies at  Boston,  New  York  and  Philadelphia 
before  participating  or  mutual  insurance  was 
introduced.  Every  one  of  them  has  quit  the 
business.  Since  that  time  at  least  two  other 
companies  have  tried  it  on  a  large  scale,  one  with 

168 


NEW   BUSINESS  169 

an  unprecedented  capital,  the  other  with  an  im- 
mense accident  business  to  pay  its  way  and  earn 
profits.  Neither  now  does  a  non-participating 
business  exclusively. 

In  a  mutual  company  the  problem  is  more  in- 
volved ;  one  must  bear  in  mind  that  the  new  ap- 
plicant is  himself  entitled  to  participate,  as  soon 
as  he  is  admitted.  It  is  not  merely  to  determine 
therefore  the  largest  expenditure  that  will  ad- 
mit of  making  money  out  of  him,  but  rather  to 
determine  what  expenditure  will  yet  permit  him 
to  participate  precisely  as  do  his  fellows,  while 
preserving  to  all  of  them  the  largest  measure  of 
participation  possible  on  any  basis  as  to  new 
business  transacted,  i.  e.,  from  a  small  to  a  very 
large  business. 

The  subject  is  fascinating.  Its  investigation 
would  inevitably  have  enlisted  the  best  actu- 
aries in  the  United  States,  had  it  not  been  that 
in  this  country  alone  actuaries  have  little  to  do 
with  the  business  management  of  companies  and 
next  to  nothing  with  their  agency  management. 

It  is  a  study  in  dynamics — at  least  as  attrac- 
tive and  illuminating  as  the  study  of  the  pres- 
sure of  population  and  its  effect  upon  land 
values  and,  in  part,  of  much  the  same  character. 
Thus,  for  instance,  in  some  companies  the  des- 
perate experiment  has  been  tried,  in  order  to 
keep  up  appearances,  of  paying  a  commission 
nearly  or  quite  equal  to  the  whole  first  year's 


170  BUSINESS  OF  LIFE  INSURANCE 

premium.  This,  of  course,  renders  it  profitable 
to  the  agent  to  give  away  policies  virtually. 
These  policies  do  not  renew  usually,  unless  the 
insured  is  in  bad  health  at  the  end  of  the  year. 
The  company,  therefore,  carries  the  year's  risk 
for  nothing — in  fact,  is  badly  out  of  pocket  for 
other  expenses  incurred  thereby — and  saves  as 
renewing  policyholders  only  impaired  lives. 
That  is  not  profitable,  clearly. 

But  at  what  point,  then,  does  saturation,  if  the 
expression  is  permissible,  take  place,  without 
waste  of  expenditure?  That  is,  what  expendi- 
ture brings  the  largest  result  in  renewing  busi- 
ness, a  larger  expenditure  bringing  too  small 
additional  results  to  pay  I  The  close  analogy 
between  this  problem  and  that  of  land  values  is 
obvious.  Patient  investigation  of  the  results  of 
the  experiments  in  agency  systems  of  any  large 
company  might  yield  an  approximate  answer, 
for  that  company  at  least,  though  the  individu- 
ality of  agents  cuts  so  large  a  figure  that  per- 
haps a  broad  enough  basis  to  make  the  deduc- 
tions safe  could  not  be  secured. 

The  thing  is  also  rendered  puzzling  by  the  dif- 
ferences in  companies  and  in  the  relative  po- 
tency of  their  appeals  to  popular  favour.  One 
company,  the  largest  in  the  British  empire, 
seems  to  have  solved  the  question  for  itself  most 
successfully,  for  at  a  low  rate  of  initial  cost,  not 
exceeding  an  average  of  about  30  per  cent,  upon 


NEW   BUSINESS  171 

the  first  premiums,  it  secures  amiually  a  larger 
new  business  in  proportion  to  the  population  of 
the  field  it  covers  than  does  any  other  company 
in  the  world — in  competition  with  the  three 
largest  and  most  vigorous  American  companies 
at  that. 

While  it  would  be  most  difficult  and  perhaps 
impracticable  to  find  a  solution  of  general  ap- 
plication of  the  question,  what  scale  of  initial 
expenditure  yields  the  largest  possible  results 
in  good,  renewing  insurances,  it  is  possible  to 
get  at  the  subject  from  another  side.  In  this 
aspect,  profit  and  not  merely  efficiency  is  consid- 
ered, and  from  this  point  of  view  a  limitation  to 
the  cost  of  new  business  to  yield  a  profit  may  be 
found. 

Let  us  take  the  case  of  the  * '  Old  Equitable ' ' 
and  see  if  we  can  find  a  way  to  determine  what 
it  might  have  done  in  1904  in  the  matter  of  ex- 
penditure for  new  business,  without  causing  its 
policyholders  to  receive  lower  earnings  than 
were  in  fact  realised.  The  new  business  of  the 
company,  secured  without  the  payment  of  com- 
missions, was  $1,284,250.  The  new  members  are 
paying  jDremiums,  exceeding  the  net  premiums 
by  a  safe  mortality  table,  by  a  loading  sufficient 
to  cover  their  shares  of  the  expenses  of  manage- 
ment and  to  secure  them  the  same  rate  of  bonus 
or  dividend  as  others.  For  several  years  to  come 
mortality  losses  among  them  will  be  lower  than 


172  BUSINESS  OF  LIFE  INSURANCE 

among  members  of  the  same  age  but  admitted 
earlier.  But  this  advantage,  less  the  cost  of  their 
medical  examination,  will  go  to  all  the  members. 

A  large  new  business  would  give  a  broader 
basis  for  the  distribution  of  expenses  of  man- 
agement and  a  larger  net  advantage  to  all  from 
salvage  in  mortal itj^  losses.  The  expenses  of 
management  would  be  increased,  however,  were 
the  new  business  much  augmented,  and,  remem- 
bering that  it  is  desired  that  the  new  business 
show  gains  above  the  profit  which  the  amount 
of  new  business  secured  without  expenditure 
shows,  it  is  safe  to  premise  that  at  least  the  gain 
to  the  policyholders  because  of  a  broader  basis 
for  distributing  management  expenses,  must  be 
preserved,  especially  if  no  expense  of  manage- 
ment be  charged  against  the  first-year  pre- 
miums. For  there  are  two  losses  to  offset,  viz., 
a  commission  paid  for  the  business  that  would 
have  been  had  without  paying  a  commission,  and 
the  foregoing  of  contributions  to  management 
expenses  by  policies  in  their  first  year. 

This  permits,  then,  an  expenditure  for  new 
business  of  the  expense  loading  on  the  first 
year's  premium — i.  e.,  the  level  loading  upon  a 
level  net  premium — plus  the  present  value  of 
the  mortality  gains  by  reason  of  fresh  selection. 
Under  the  loading  system  of  leading  American 
companies,  this  admits  of  initial  cost  of  new 
business  as  follows,  without  prejudice  to  the 


NEW   BUSINESS  173 

dividends  of  policyholders,  as  compared  with 
accepting  only  such  new  business  as  offers  vol- 
untarily and  without  the  payment  of  a  consid- 
eration for  the  business. 

Taking  representative  premiums,  American  Ex- 
perience, 3  per  cent. : 

Age  25 

Gains  on  Per 

Plan.  Premium.  Loading.  Mortality.    Total,      cent. 

Life  28.11  7.03  10.75  17.78  .63 

Life,  20  P 38.34  8.49  10.52  10.01  .50 

Life,  15  P 45.91  9.57  10.37  19.94  .44 

Life,  10  P 61.53  11.80  10.02  21.82  .36 

End  20  years..  52.47  10.50  10.21  20.71  .40 

End  15  years..  70.50  13.08  9.86  22.94  .33 

End  10  years..  107.70  18.40  9.04  27.44  .24 

Taking  representative  premiums,  American  Ex- 
perience, 3^  per  cent. : 

Age  35 
Gains  on  Per 

Plan.  Premium.  Loading.  Mortality.    Total,      cent. 

Life 27.30  7.39  10.67  18.06  .66 

Life,  20  P 36.00  8.60  10.48  10.08  .53 

Life,  15  P 42.60  9.55  10.34  19.89  .47 

Life,  10  P 56.30  11.52  10.01  21.53  .39 

End  20  years..  50.80  10.68  10.16  20.84  .41 

End  15  years..  68.60  13.23  9.79  23.02  .34 

End  10  years..  105.60  18.58  8.93  27.51  .26 

These  percentages  cover  all  that  can  be  paid 
for  new  business  to  yield  a  profit,  i.  e.,  to  main- 


174  BUSINESS  OF  LIFE  INSURANCE 

tain  at  least  as  good  dividends  for  all  policy- 
holders as  if  no  commissions  were  paid,  and  only 
such  new  business  were  taken  as  comes  in  with- 
out the  labours  of  paid  solicitors.  They  cover 
also  the  entire  outlay,  i.  e.,  for  all  expenses 
chargeable  to  new  business,  and  not  commis- 
sions only;  and  they  apply  without  regard  to 
whether  the  ''preliminary  term"  device  is  in  use 
or  not.  That  device  serves  merely  to  furnish 
funds  to  meet  the  preliminary  expenses  when 
needed;  it  does  not  in  any  sense  afford  a  cri- 
terion as  to  what  rate  of  expenditure  secures  the 
best  results  for  the  policyholder,  though  it  is 
much  better  even  as  a  criterion  than  is  none  at 
all,  for  it  at  least  runs  up  the  danger  signal  of 
possible  impairment  when  its  liberal  provision 
for  initial  expense  is  being  exceeded.  The  old 
system  leaves  managers  without  even  this  chart 
to  sail  by,  and  many  have  gone  upon  the  shoals 
or  the  rocks  for  this  reason. 

It  is  interesting  to  observe  that  the  companies 
in  the  United  States  which  are  giving  the  best 
dividends  to  policyholders  are  those  which  have 
kept  the  cost  of  new  business  pretty  well  under 
the  percentages  given  in  the  foregoing  illustra- 
tion; which  is,  perhaps,  a  practical  demonstra- 
tion of  their  general  correctness,  apart  from 
the  a  priori  reasoning  which  deduced  them. 


CHAPTER  XIX 

LEGAL  RESERVE  REQUIREMENTS   AND  THEIR  EFFECT 

It  is  needless  to  say  to  the  readers  of  this 
series  that  the  law  is  not  responsible  for  the 
necessity  for  reserves,  but  instead  the  necessity 
for  reserves  is  responsible  for  the  law. 

A  level  premium  to  cover  an  increasing  risk 
is  of  course  larger  at  the  outset  than  is  needed 
to  cover  the  current  cost  of  the  insurance,  and 
smaller,  later,  than  the  current  cost.  It  can  be 
maintained  level  only  by  reserving  the  overplus 
in  the  early  years  to  meet  the  deficiencies  in  the 
later  years.  For  a  company  to  collect  these  full 
premiums  and  yet  to  fail  to  hold  in  reserve  the 
accumulation  from  them  which  will  be  required 
in  order  to  fulfil  its  engagements  is  to  perpe- 
trate a  fraud  upon  its  policyholders. 

The  sound  mathematical  basis  of  the  first  com- 
pany to  undertake  a  level  premium  business 
called  for  valuations  from  time  to  time,  showing 
whether  the  accumulations  actually  in  hand  were 
equal  to  the  reserves  required.  This  was  not 
neglected,  also,  and  thus  from  the  very  outset  a 

175 


176  BUSINESS  OF  LIFE  INSURANCE 

good  example  was  set  in  the  matter  of  business 
prudence  and  a  due  regard  for  solvency. 

The  first  premiums  employed  by  that  com- 
pany were  net,  i.  e.,  were  not  loaded  for  expenses 
or  contingencies.  They  were  based  upon  a  mor- 
tality table,  deduced  from  the  ''mortality  bills" 
of  London,  and  fortunately  were  redundant.  In 
computing  what  reserves  were  necessary,  and 
what  surplus  was  on  hand,  the  following  course 
was  pursued:  A  balance  sheet  was  drawn  up, 
showing  on  the  resources  side  the  cash  on  hand, 
the  invested  assets,  the  accrued  interest  and  the 
present  value  of  all  premiums  to  be  received  in 
future ;  and  on  the  liabilities  side,  the  outstand- 
ing claims,  the  amounts  of  interest  and  pre- 
miums received  in  advance  and  the  present 
value  of  all  the  death  claims  payable  in  future. 
The  amount  required  to  strike  a  balance  would 
be  surplus  or  deficiency,  according  as  the  re- 
sources exceeded  the  liability,  or  the  contrary. 
The  account  stood  then,  assuming  it  showed  a 
surplus,  as  follows: 

Eesources —  Liabilities — 

Present  value  of  fu-  Claims  unpaid. 

ture  premiums.  Interest  and  premiums 

Interest  due  and  ac-  in  advance. 

crued.  Present   value   of   fu- 

Investments.  ture  claims. 

Cash  on  hand.  Surplus. 


LEGAL  RESERVE  REQUIREMENTS  177 

In  all  the  foregoing,  nothing  has  been  said 
about  reserve.  But  the  present  value  of  future 
claims  is  computed  by  assuming  that  the  deaths 
will  occur  according  to  the  table  and  that  inter- 
est at  a  given  rate  can  be  realised  upon  the 
funds  until  required,  and  the  present  value  of 
the  premiums  is  computed  by  assuming  that  the 
policyholders  survive  to  pay  premiums  precise- 
ly according  to  the  mortality  table  and  on  the 
same  assumption  as  to  interest.  And,  obviously, 
whatever  of  the  present  value  of  future  claims 
the  present  value  of  future  premiums  fails  to 
cover  needs  to  be  made  good  by  present  assets, 
reserved  for  that  purpose  and  accumulated  at 
interest  until  needed.    That  is  the  reserve. 

The  foregoing  balance  sheet  form  has  been 
discarded  in  Great  Britain  for  two  others,  more 
nearly  as  follows : 

VALUATION. 

Present  value  of  fu-     Present  value  of  fu- 
ture premiums.  ture  claims. 
Reserve  required. 

STATEMENT. 

Assets —  Liabilities — 

Cash  on  hand.  Claims  unpaid. 

Investments.  Life  insurance  fund. 

Interest  due  and  ac- 
crued. 


178  BUSINESS  OF  LIFE  INSURANCE 

In  the  United  States  only  the  "statement"  is 
given  and  in  that  ''life  insurance  fund"  gives 
way  to  "reserve"  and  "surplus,"  the  present 
values  of  claims  and  premiums  are  not  com- 
puted separately  and  the  meaning  of  the  reserve 
is  therefore  not  so  apparent. 

As  has  been  said,  the  first  gross  or  oflfice  pre- 
miums of  the  first  company  to  do  a  level  pre- 
mium business  were  the  net  premiums  by  the 
very  standards  of  mortality  and  interest  used 
in  the  valuation.  When  that  company  changed 
its  standards,  it  "loaded"  the  net  premium;  but 
in  its  valuations  necessarily  the  question  arose : 
Should  it  treat  the  entire  premiums  receivable 
as  future  resources  available  to  meet  future 
claims,  or  merely  such  part  of  the  future  pre- 
miums as  equalled  the  net  premiums  by  the 
mortality  table  and  interest  used  in  the  valua- 
tion? 

At  this  day  the  proper  reply  appears  to  be 
obvious.  The  loading  must  have  been  added  to 
meet  future  expenses  and  contingencies.  To 
admit  its  present  value  to  the  balance  sheet, 
without  a  corresponding  entry  for  future  ex- 
penses and  contingencies,  would  be  to  throw  all 
this  provision  into  surplus,  immediately  availa- 
ble, and  thus,  by  reserving  only  sufficient  to  sup- 
plement future  gross  premiums  in  meeting  fu- 
ture claims,  to  strip  the  company  of  all  the  pro- 
vision for  future  expenses  and  contingencies. 


LEGAL  RESERVE  REQUIREMENTS  179 

As  life  insurance  developed,  the  issue  between 
"gross  valuation" — i.  e.,  by  allowing  the  pres- 
ent value  of  gross  future  premiums  only — ^be- 
came very  strenuous.  The  greatest  actuaries 
were  hopelessly  divided  on  the  question;  some 
of  them  were  led  into  certifying  to  the  sol- 
vency of  concerns  which  were  already  wholly 
ruined. 

In  the  United  States,  in  the  earliest  days  of 
life  insurance,  companies  did  about  as  they 
pleased.  No  very  clear  conception  did  they  have 
of  valuation  or  reserves.  Some  of  them  even 
gave  back  in  dividends  all  that  was  left  after 
paying  current  claims  and  expenses.  Others 
accumulated  funds,  but  did  not  know  how  to  de- 
termine what  accumulation  was  required.  Usual- 
ly they  made  use  of  the  same  premiums  as  estab- 
lished British  companies,  so  that  if  there  was 
not  extravagance  or  inflated  apportionment  of 
dividends,  the  accumulation  was  likely  to  be 
equal  to  the  required  reserve.  But  the  com- 
panies had  no  means  of  knowing  that  it 
was. 

The  introduction  of  the  requirement  of  a  defi- 
nite reserve  is  due  almost  wholly  to  one  man, 
Elizur  Wright,  the  Commissioner  of  Insurance 
of  Massachusetts.  Mr,  Wright  was  already  an 
old  man  when  appointed  to  office;  but  he  was 
b6th  an  expert  mathematician  and  a  reformer, 
precisely  suited  to  the  work  he  undertook. 


180  BUSINESS  OF  LIFE  INSURANCE 

His  skill  in  mathematics  made  it  possible  for 
him  to  absorb  very  quickly  all  that  books  could 
tell  him  about  the  subject;  his  reform  senti- 
ments led  him  to  make  prompt  application  of 
what  he  had  learned.  He  first  called  for  state- 
ments from  each  company  doing  business  in 
Massachusetts,  including  the  reserve  upon  its 
policies  or  else  a  schedule  of  the  same  ready  for 
his  valuation.  He  computed  the  reserves  by  a 
mortality  table  deduced  from  the  experience  of 
seventeen  British  offices,  known  in  this  country 
as  the  Actuaries '  Table,  and  4  per  cent,  interest. 
This  table  had  just  then  been  introduced.  It  was 
the  first  to  be  taken  from  the  combined  experi- 
ence of  insurance  companies.  In  making  these 
valuations  he  employed  net  premiums  only,  in 
effect  allowing  the  excess  of  the  gross  premiums 
over  the  net  premiums  as  an  offset  to  future  ex- 
penses and  contingencies. 

His  methods  were  contested  promptly  and  bit- 
terly. One  of  the  American  companies  filed  its 
own  statement  of  reserve  liability,  a  sum  far  too 
small  to  answer  the  requirements.  Yet  a  certifi- 
cate from  a  leading  professor  of  mathematics 
was  put  behind  these  figures.  He  also  ridiculed 
Wright's  methods  and  pretensions. 

A  much  more  serious  attack  was  made  upon 
the  commissioner's  mode  of  valuation  by  the 
two  leading  actuaries  of  Great  Britain  on  behalf 
of  a  British  company,  the  valuation  of  which  by 


LEGAL  RESERVE  REQUIREMENTS  181 

one  of  them  he  disputed.  The  following  short 
selections  from  the  correspondence  are  interest- 
ing: 

''The  calculations  of  the  commissioners,  in 
the  report  alluded  to,  being  based  on  a  hypoth- 
esis of  fictitious  premiums,  having  no  relation 
whatever  to  the  society's  tables  or  the  premiums 
actually  receivable,  are  necessarily  fallacious, 
and  may  be  regarded  purely  as  a  fabrication.  It 
would,  therefore,  be  a  waste  of  time  to  enter  on 
any  discussion  of  them  beyond  the  announce- 
ment of  this  undoubted  fact." — W.  S.  B.  Wool- 
house. 

"The  commissioners  apparently  wished  in 
their  calculations  to  determine  the  value  of  the 
net  premiums,  although  they  have  not  succeeded 
in  doing  so.  Let  us,  however,  consider  whether 
a  valuation  of  net  premiums  is  really  that  which 
in  justice  was  required,  or  which  is  sanctioned 
by  practice.  Calculations  intended  for  the  pub- 
lic security  do  not  require  to  be  made  in  the  ana- 
lytical forms  which  may  be  needed  for  the  regu- 
lation of  many  of  the  internal  affairs  of  a  com- 
pany ;  but  still  it  is  well  known  that  many  of  our 
wealthiest,  largest  and  undoubtedly  best  estab- 
lished offices,  even  for  the  adjustment  of  their 
own  interests  as  among  the  members  them- 
selves, as  well  as  with  the  public,  have  always 
valued  the  gross  premiums,  and  still  continue  to 
do  so.   It  is  held  that  the  whole  of  the  premiums 


182  BUSINESS  OF  LIFE  INSURANCE 

is  as  completely  and  as  entirely  the  property  of 
the  society  as  a  part  of  it,  and  there  is  as  much 
right  to  calculate  on  receiving  the  one  as  the 
other.  A  few  years  ago  two  able  papers  were 
read  before  the  Institute  of  Actuaries  by  one  of 
its  leading  members,  insisting  on  a  valuation  of 
the  gross  premiums  as  being  a  correct  way  of 
proceeding,  and  that  any  other  is  merely  dealing 
with  fiction,  and  not  with  facts." — F.  G.  P. 
Neison. 

''There  is  no  room  here  for  more  opinion  in 
this  matter ;  it  is  a  simple  case  for  the  applica- 
tion of  strict  mathematical  principle.  The  stand- 
ard of  value  adopted  by  the  commissioners  on 
the  thirty-sixth  page,  is  ideal  and  fictitious,  and 
must  yield  to  the  actual  facts  as  they  are  em- 
bodied in  the  reports  of  your  actuaries." — Ben- 
jamin Pierce. 

Both  the  American  company  and  the  British 
company  soon  proved  the  correctness  of  Elizur 
Wright's  diagnosis,  and  prognosis  as  well,  by 
becoming  commercially  insolvent.  Mr.  Wright 
laid  down  the  following  standards : 

Assume  that  the  mortality  will  be  precisely  as 
per  the  Actuaries'  Table,  i.  e.,  as  was  the  com- 
bined experience  of  seventeen  British  compa- 
nies. 

Assume  that  net  interest  of  not  more  than  4 
per  cent,  will  be  realised — a  very  conservative 
assumption  then,  but  justified  by  the  event. 


LEGAL  RESERVE  REQUIREMENTS  183 

Assume  that  the  future  expenses  and  contin- 
gencies will  precisely  absorb  the  ''loading"  pro- 
vided to  cover  them;  consequently  make  a  "net 
valuation" — i.  e.,  allow  the  present  value  of  fu- 
ture net  premiums  only. 

The  commissioner  of  Massachusetts  had  in 
this  contention  the  support  of  most  of  the  Amer- 
ican companies  and  their  actuaries. 

The  State  of  New  York  soon  followed,  first 
using  a  British  census  table,  known  as  Farr's 
No.  3,  and  5  per  cent,  interest  as  its  standard, 
and  later  substituting  the  American  Experience 
table,  deduced  from  the  experience  of  the  largest 
American  company,  and  4J  per  cent,  interest. 
Since  then  State  standards  have  been  according 
to  one  or  other  of  these  tables,  with  interest 
from  44  per  cent,  to  3^  per  cent.  The  standard 
in  Massachusetts,  New  York  and  Pennsylvania 
is  now  the  American  Experience  Table  and  3^ 
per  cent,  for  all  insurance  issued  since  1900  and 
the  Actuaries '  Table  and  4  per  cent,  for  all  be- 
fore that  date. 

It  will  be  observed  that  in  all  this  no  provision 
is  made  for  the  excess  of  first  year's  expenses 
over  the  difference  between  the  gross  level  pre- 
mium and  the  net  level  premium  for  the  first 
year.  At  first  this  was  of  little  importance 
because  commissions  were  very  small,  but 
later  it  cut  a  larger  figure  in  life  insurance 
affairs. 


184  BUSINESS  OF  LIFE  INSURANCE 

The  first  mode  of  evasion  was  by  means  of 
advances  against  renewal  commissions  which 
were  allowed  in  the  statements  as  valid  assets, 
commissioners  not  divining,  apparently,  that 
this  was  tantamount  to  permitting  the  ''load- 
ing" to  be  anticipated  in  part,  precisely  as  if  the 
valuation  had  been  by  allowing  the  present  value 
of  more  than  the  net  premiums. 

The  following  descriptions  of  the  conditions 
which  followed  the  reversal  of  this  attitude  of 
the  commissioners  were  given  by  the  most  emi- 
nent living  American  actuary : 

"The  net  reserve  system  has  many  elements 
of  advantage,  but  there  is  one  evil  connected 
with  it  which  it  was  heterodox  to  discuss  thirty 
years  ago,  but  which  is  now  widely  understood 
and  admitted.  This  evil  consists  in  the  require- 
ment that  a  reserve  must  be  laid  aside  out  of  the 
first  year's  premium.  I  am  speaking  particu- 
larly of  ordinary  life  policies,  and  what  I  have 
to  say  requires  qualification  if  applied  to  any 
other  form.  It  has  long  been  recognised  that 
the  expense  attending  the  procurement  of  busi- 
ness is  so  great  as  to  permit  no  actual  accumula- 
tion of  reserve  out  of  the  first  year's  premium. 
The  risks  have  just  passed  the  doctor,  it  is  true, 
yet  death  losses  will  occur  within  the  first  year, 
and  must  be  paid.  Apart  from  the  commissions 
to  agents,  there  are  other  well-known  expenses 
attending  the  prosecution  of  new  business,  and 


LEGAL  RESERVE  REQUIREMENTS  185 

these  otlier  expenses  are  in  some  companies 
greater  in  amount  than  the  commissions  paid 
for  new  business.  "While  not  always  strictly  true, 
it  may  be  laid  down  as  a  general  statement  that 
the  commissions  and  the  other  expenses  taken 
together  will  use  up  pretty  much  all  the  first 
premium. 

''The  highest  living  authority,  Dr.  Sprague, 
of  Edinburgh,  called  attention  some  time  since 
to  the  fact  well  known  in  Great  Britain  that  the 
expenses  of  new  business  practically  consume 
the  first  premium,  and  proposed  that  the  reserve 
should  begin  to  be  accumulated  out  of  the  second 
premium.  There  is  much  to  be  said  for  this 
proposition,  particularly  in  the  case  of  compa- 
nies newly  organised,  which  have  no  assistance 
from  any  of  the  sources  of  miscellaneous  profit 
which  an  established  company  possesses,  such 
as  annuities  and  non-participating  insurances, 
and  no  penalties  contributed  by  retiring  policy- 
holders towards  the  expense  of  replacing  the 
discontiliued  risks. 

'  *  While  other  causes  were  at  work,  the  chief 
cause  of  the  universal  slaughter  of  small  com- 
panies, which  took  place  about  twenty-five  years 
ago,  was  the  legal  requirement  of  a  reserve  in 
the  first  year  of  each  policy.  The  energies  which 
in  this  growing  countiy  might  have  been  turned 
toward  the  establishment  of  new  and  prosperous 
life  companies,  were  directed  by  this  reserve 


186  BUSINESS  OF  LIFE  INSURANCE 

difi&culty  into  another  channel,  and  a  great  cry 
arose  for  life  insurance  without  reserves.  Had 
Dr.  Sprague's  proposal  been  available  under 
our  laws,  we  should  have  heard  comparatively 
little  of  assessment  insurance  with  all  its  good 
and  all  its  evil." — Address  by  Mr.  Emory  Mc- 
Clintock,  Convention  of  Insurance  Commission- 
ers. 

"At  the  end  of  1868,  when  the  law  was  begin- 
ning to  be  enforced  closely,  there  were  doing 
business  in  New  York  twenty  companies  organ- 
ised after  the  war,  and  of  these  every  non-indus- 
trial company — that  is  to  say,  all  of  the  twenty 
except  the  Metropolitan — failed.  In  1869  nine 
more  new  companies  began  to  do  business,  every 
one  of  which  failed.  In  1870  and  1871,  four  or 
five  new  companies  began  business,  all  of  which 
failed.  Most  of  the  companies  which  commenced 
business  before  the  end  of  the  war  had  acquired 
stability  by  age,  although  some  of  these  older 
companies  also  failed  during  the  trying  times  of 
the  early  seventies. 

"To  sum  up  this  remarkable  history,  all  non- 
industrial  companies  doing  business  in  New 
York  prior  to  1875,  to  which  the  net  valuation 
law  was  rigorously  applied  during  the  first  few 
years  of  their  existence,  failed.  Since  1875  we 
have  seen  one  or  two  companies  established  in 
New  York,  notwithstanding  the  law,  such  as  the 
Provident  Savings,  but  any  such  company  has 


LEGAL  RESERVE  REQUIREMENTS  187 

in  self-defence  been  compelled  to  confine  its 
earlier  business  to  plans  requiring  little  or  no 
reserve  liability,  such  as  the  natural  premium 
plan  or  the  renewable  term  plan.  The  well- 
known  practical  impossibility  of  establishing  a 
regular  life  company  under  a  rigorous  enforce- 
ment of  the  net  valuation  law  remains  unchal- 
lenged by  any  example  to  the  contrary.  *  *  * 
* '  The  legal  difficulty  was  this :  For  every  pol- 
icy issued  a  reserve  had  to  be  put  up,  somewhat 
exceeding  half  the  first  year's  premium,  and  out 
of  the  remainder  of  the  premiums  the  new  com- 
pany had  to  pay  its  current  death  losses  and  ex- 
penses of  all  descriptions.  After  a  company  is 
once  fairly  established  its  business  is  so  much 
larger  as  to  reduce  the  pressure  of  its  general 
expenses,  as  distinguished  from  the  expense  of 
procuring  new  business,  and  towards  the  ex- 
pense of  procuring  new  business  the  established 
company  has  resources  which  are  wholly  want- 
ing at  the  start.  Those  who  drop  their  policies 
in  an  established  company  are  expected  to  leave 
behind  them  something  in  the  way  of  "surren- 
der charge"  as.  their  contribution  towards  the 
cost  of  replacing  the  risks  withdrawn  by  their 
discontinuance,  and  there  are  some  other 
sources  of  profit,  as  for  example  the  gains  which 
may  arise  from  non-participating  business.  An 
established  company  can  therefore  put  up  the 
reserve  on  new  business  required  by  the  law, 


188  BUSINESS  OF  LIFE  INSURANCE 

while  a  new  company  cannot." — Mr.  Emory 
McClintock  in  United  States  Review. 

For  nearly  a  quarter  century  after  this  "rig- 
orous enforcement  of  the  net  valuation  law,"  as 
was  stated,  no  new  company  on  the  usual  level 
premium  plan  was  founded  which  achieved  suc- 
cess. Most  of  their  managers  but  dimly  under- 
stood what  ruined  them. 

About  ten  years  ago  ''preliminary  term," 
which  had  been  introduced  in  this  country  some 
five  years  earlier  in  connection  with  certain  com- 
panies not  under  the  legal  reserve  laws,  was 
given  a  trial  by  some  of  the  smaller  of  the  older 
companies.  Shortly  afterward  and  until  this 
day  new  companies  have  been  organised  to  ope- 
rate on  that  basis. 

This  provision  is  as  follows:  The  first  an- 
nual premium  is  paid  and  received  for  an  insur- 
ance for  one  year  only.  It  is  agreed  that  if  the 
policy  be  renewed  it  shall  be  as  a  level  premium 
policy,  with  full  reserves,  from  the  date  of  the 
renewal. 

This  plan,  as  has  been  seen  already,  had 
strong  endorsements  in  Germany,  Great  Britain 
and  the  United  States,  so  far  as  applied  to  whole 
life  policies  only.  Except  by  a  few  companies, 
however,  this  limitation  has  not  been  regarded 
in  America,  and  several  leading  American  actu- 
aries have  endorsed  it,  without  reference  to  the 
limitation. 


LEGAL  RESERVE  REQUIREMENTS  189 

The  method  of  escaping  the  excessive  reserve 
charge  the  first  year  has  been  by  making  the  con- 
tract such  in  its  terms  that  the  policy  must  be 
valued  as  for  one  year  term  insurance  the  first 
year.  The  policies  have  been  so  construed  by 
all  the  insurance  departments,  excepting  those 
of  Massachusetts,  Vermont  and  the  District  of 
Columbia.  In  Massachusetts  the  court  of  high- 
est resort  has  upheld  the  discretion  of  the  com- 
missioner. In  Vermont  the  court  of  highest  re- 
sort has  twice  held  adversely  to  the  commission- 
ers and  in  favour  of  the  natural  construction  of 
these  contracts  according  to  their  terms.  There 
has  been  no  final  issue  in  the  District  of  Colum- 
bia. 

There  are  at  least  three  glaring  faults  in  the 
system  of  charging  net  reserves  on  the  basis 
that  the  net  premiums  are  level,  viz. : 

1.  The  absence  of  a  fair  provision  for  first 
year's  expenses,  which  almost  wholly  prevents 
the  establishment  of  new  companies  and  the  suc- 
cess and  growth  of  small  companies,  while  old 
and  strong  companies  borrow  from  policyhold- 
ers' surplus  the  funds  which  they  require  for 
this  purpose. 

2.  The  charging  of  policy  liabilities  as  if  the 
mortality  were,  throughout  the  life  of  the  pol- 
icy, precisely  as  per  the  Actuaries ',  or  the  Amer- 
ican Experience  Table;  whereas  the  mortality 
for  the  first  year  is  not  more  than  50  per  cent., 


190  BUSINESS  OF  LIFE  INSURANCE 

the  second  year  65  per  cent.,  the  third  year  75 
per  cent.,  the  fourth  year  85  per  cent.,  and  the 
fifth  year  95  per  cent. 

3.  The  failure  to  furnish  a  reliable  criterion 
by  means  of  which  to  determine  what  rate  of 
initial  expenditure  is  profitable. 

It  was  suggested  by  a  former  actuary  of  the 
Massachusetts  department  that  these  gains 
might  in  some  way  be  offset  against  the  excess 
cost  of  new  insurances.  The  following  pre- 
sents his  views,  including  a  vivid  picture  of 
the  conditions  when  ''rigorous  net  valuation," 
i.  e.,  with  "preliminary  term"  proscribed,  is 
enforced : 

"As  it  seems  to  me,  we  are  right  up  against 
this  very  pertinent  and  insistent  question,  'Do 
we  need  and  want  any  more  life  companies  than 
the  twenty  or  thirty  which  we  know  are  now 
firmly  established  V  If  we  do  not,  all  right ;  let 
the  present  effective  processes  of  choking  down 
and  strangling  the  kids  and  weaklings  go  on.  If 
we  do  want  them,  is  there  not  some  reasonable 
method  of  relief  and  aid  possible! 

"Under  the  prevailing  method  of  compensat- 
ing agents  and  solicitors  it  seems  impossible  for 
a  new  or  small  company  to  acquire  sufficient 
business  to  give  it  a  chance  of  survival.  We  all 
know  where  the  trouble  is,  and  that  it  seems  out 
of  the  power  of  managers  or  laws  to  correct  it. 
Everybody  admits  the  conditions,  but  our  high 


LEGAL  RESERVE  REQUIREMENTS  191 

authorities,  instead  of  suggesting  or  attempting 
to  find  a  practical  and  legal  remedy,  content 
themselves  with  asserting  that  under  the  pre- 
vailing net  valuations  the  inevitable  alterna- 
tives are  failure  or  an  evasion  or  violation  of  the 
law.  Now,  is  this  really  so,  and  is  it  not  possible 
by  holding  a  strict  regard  to  the  actual  facts,  to 
find  a  reasonable  measure  of  relief?" 

The  method  suggested  by  him  was  by  an  al- 
lowance for  salvage  on  mortality  losses  during 
the  first  five  years. 

Though  such  a  method  for  offsetting  these 
gains  against  initial  cost  has  received  the  en- 
dorsement of  several  leading  actuaries  and  the 
qualified  endorsement  of  others,  no  steps  have 
been  taken  to  amend  the  legal  reserve  laws. 
Such  an  amendment,  if  made,  would  intimate  to 
each  company  very  plainly  the  conservative 
limit  of  profitable  expenditure  for  new  business, 
and  if  accompanied  by  suitable  provisions  for 
reporting  the  amount  of  the  provision  in  the  an- 
nual statements,  would  afford  an  excellent  basis 
for  comparing  the  economy  and  efficiency  of  the 
agency  managements  of  companies. 

Preliminary  term,  confined  to  the  ordinary 
life  rate,  as  recommended  by  Actuaries  Zillmer, 
Sprague  and  McClintock,  gives  margins  very 
nearly  the  same  as  this  system,  as  appears  by 
comparing  with  the  tables  printed  in  Chapter 
18,  the  following  tables : 


192  BUSINESS  OF  LIFE  INSURANCE 

THREE  PER  CENT. 
Plan.  Premium.  Loading.  Allowed.  Total.  P.O. 

Life 28.11    6.37  13.05  19.42  .69 

Life 20  P.       38.34    7.56  13.05  20.61  .54 

Life 15  P.       45.91    8.43  13.05  21.48  .47 

Life 10  P.        61.53  10.26  13.05  23.31  .38 

End 15  yrs.     70.50  11.95  13.05  25.00  .355 

End 10  yrs.  107.70  16.85  13.05  29.90  .28 

THREE  AND  A  HALF  PER  CENT. 

Plan.  Premium.  Loading.  Allowed.  Total.  P.O. 

Life 27.30    6.75  11.90  18.65  .68 

End 20  yrs.  52.47    9.57  13.05  22.62  .43 

Life 20  P.  36.00    7.72  11.90  19.62  .545 

Life 15  P.  42.60    8.49  11.90  20.39  .48 

Life 10  P.  56.30  10.08  11.90  21.98  .39 

End 20  yrs.  50.80    9.80  11.90  21.70  .42 

End 15  yrs.  68.60  12.18  11.90  24.08  .34 

End 10  yrs.  105.60  17.43  11.90  29.33  .28 

These  tables  show  the  margins,  not  counting 
any  gains  from  mortality,  when  the  "prelimi- 
nary term"  provision  is  confined  to  the  amount 
of  the  life  premium  in  every  case,  a  reserve  be- 
ing set  up  out  of  any  additional  premium,  paid, 
not  for  life  insurance,  but  either  to  prepay  pre- 
miums on  a  life  policy  beyond  a  certain  period 
or  to  mature  the  policy  at  the  end  of  a  certain 
term,  as  an  endowment. 


CHAPTER  XX 

THE  EVOLUTION   OF  VAEIETIES   OP  LIFE  INSURANCE 
POLICIES 

In  the  mind  of  Tliomas  Simpson,  the  English 
mathematician  who  brought  about  the  organisa- 
tion of  the  first  life  insurance  company  on  the 
level  premium  plan,  practically  but  one  sort  of 
a  life  insurance  policy  was  present,  viz.,  the  pol- 
icy for  the  whole  period  of  life,  paid  for  by  pre- 
miums payable  throughout  life. 

Of  course,  short  term  insurance  was  already 
in  existence.  In  order  to  meet  that  demand,  his 
company  granted  it  when  called  for.  But  the 
whole  life  policy  was  the  life  insurance  policy; 
and,  except  as  the  sale  of  other  forms  has  been 
especially  fostered  in  one  way  or  another  and 
as  the  field  of  insurance  for  protection  only  has 
been  turned  over  to  assessment  societies  and 
fraternities,  it  yet  remains  the  favourite  form. 

In  computing  the  annual  premium  Mr.  Simp- 
son arrived  at  the  single  premium  first,  and 
therefore  the  idea  of  permitting  an  insurance 
for  the  whole  period  of  life  to  be  paid  for  by  one 

193 


194  BUSINESS  OF  LIFE  INSURANCE 

premium  in  advance  was  presented.  This  was 
allowed,  but  little  was  made  of  it,  though  when 
the  surplus  was  divided,  it  was  applied  in  rever- 
sionary bonuses,  i.  e.,  in  purchasing  paid-up  ad- 
ditions to  the  sum  insured,  by  means  of  the  sin- 
gle premium  rates  for  the  same. 

Manifestly,  also,  this  whole  life  insurance 
could  be  paid  for  in  ten,  fifteen  or  twenty  annual 
premiums,  instead  of  in  one  premium  or  in  an- 
nual premiums  throughout  life.  That  is,  lim- 
ited payment  life  policies  could  be  offered  and 
soon  were  offered.  In  recent  years  the  propor- 
tion of  limited  payment  life  policies  to  the  whole 
number  issued  each  year  by  the  regular  level 
premium  companies  has  been  rapidly  growing. 

It  was  but  a  step  to  endowment  insurances, 
under  which  the  sum  insured  is  payable  at  the 
end  of  a  fixed  period  if  the  insured  survives,  or 
at  once  in  event  of  his  prior  death. 

Then,  out  of  the  desire  to  leave  an  annuity  for 
the  beneficiary,  grew  the  survivorship  annuity 
policy  under  which,  if  the  beneficiary  survived 
the  insured,  an  annuity  was  payable  to  her  for 
her  after-lifetime.  This  was  always  a  favourite 
with  actuaries  who  know  what  the  chances  are 
and  that  the  premiums  paid  are  fair  and  propor- 
tionate to  the  risk,  and  who  therefore  do  not  feel 
that  they  are  robbed  in  case  the  beneficiaries 
die  first.  Thirty  years  ago  or  more  it  became 
known  that  the  leading  American  actuary  of  his 


THE  EVOLUTION  OF  POLICIES   195 

generation  carried  all  his  life  in^gurance  on  this 
plan,  and  the  same  is  now  true  of  the  greatest 
American  actuary  now  living. 

To  meet  the  ordinary  man's  deep-rooted  ob- 
jection to  having  paid  his  money  for  nothing,  as 
he  would  put  it,  in  case  his  beneficiary  dies  first, 
the  pajTuent  of  the  proceeds  of  a  life  insurance 
in  instalments  was  introduced,  the  instalments 
running  over  a  period  of  ten,  fifteen  or  twenty 
years.  As  has  already  been  explained,  the  com- 
pany needed  only  to  charge  for  this  form  of  in- 
surance the  premium  which  it  would  charge  for 
a  lump  sum  insurance  for  the  amount  of  the 
commuted  value  of  the  instalments.  This  com- 
muted value  in  the  cases  of  most  policies  issued 
before  1900  was  computed  at  4  per  cent,  interest ; 
of  policies  issued  since  then,  at  3|  per  cent,  by 
some  companies  and  at  3  per  cent,  by  others.  A 
very  few  companies  pay  the  net  surplus  interest 
realised  on  the  fund,  as  a  cash  dividend,  with 
each  instalment.  The  instalment  plan  could  be 
and  usually  is  applied  to  all  the  usual  forms  of 
policies  when  desired. 

The  ordinary  man  soon  found  an  objection  to 
this ;  having  run  out,  it  might  and  in  many  cases 
would  leave  the  beneficiary  without  an  income 
precisely  in  her  old  age  when  this  would  be  most 
inconvenient. 

To  meet  this  objection  Emory  McClintock, 
actuary  of  the  largest  company,  invented  a  very 


196  BUSINESS  OF  LIFE  INSURANCE 

simple  device  which  nobody  had  had  the  wit  to 
think  of,  viz.,  a  policy  which  paid  so  many  an- 
nual instalments  certain,  and  if  the  beneficiary 
survived  that  term  continued  the  instalments  so 
long  as  she  lived.  This  answered  the  ordinary 
man's  objection  to  the  survivorship  annuity 
plan,  for  now,  even  though  the  beneficiary  died 
before  the  insured  or  soon  afterward,  the  in- 
stalments would  go  on  for  the  period  certain  and 
all  the  money  paid  was  not  lost.  And  also  his 
objection  to  the  instalment  policy,  for  now 
certain  provision  was  made  for  possible  sur- 
vival of  the  beneficiary  beyond  the  period  cer- 
tain. 

This  was  also  applied  to  endowment  policies, 
the  annuity  being  payable  for  the  after-lifetime 
of  the  beneficiary  in  case  of  the  death  of  the  in- 
sured during  the  period,  but  for  the  after-life- 
time of  the  insured  or  of  the  last  survivor  of  the 
insured  and  beneficiary  in  event  of  the  insured's 
survival  of  the  endowment  period,  in  each  case 
the  instalment  being  payable  for  twenty  years 
certain.  By  means  of  this  policy  one  may  make 
certain  of — 

1st.  An  income  of  $1,000,  say,  per  annum  to 
his  widow  for  life. 

2d.  A  like  income  to  a  designated  beneficiary 
(or  the  insured's  estate)  after  the  death  of  the 
widow  if  she  fails  to  survive  twenty  full  years, 
for  the  remainder  of  the  twenty  years. 


THE  EVOLUTION  OF  POLICIES   197 

3d.  A  like  income  beginning  at  the  end  of  the 
period  and  for  the  life  of  the  insured  and  the 
beneficiary  and  until  the  last  survivor  suc- 
cumbs. 

4th.  Should  the  insured  and  beneficiary  both 
die  in  less  than  twenty  years  after  maturity  a 
like  income  to  a  designated  beneficiary  or  the 
insured 's  estate  for  the  remaining  years  to  make 
up  twenty  full  years'  payments. 

Yet  another  application  of  the  plan  of  paying 
the  proceeds  in  instalments  is  the  so-called  guar- 
anteed interest  bond,  the  condition  of  which  is 
that  after  the  maturity  of  the  bond  by  the  death 
of  the  insured  or  the  completion  of  the  endow- 
ment period,  the  company  will  pay  interest  an- 
nually at  a  certain  rate  upon  the  principal  sum 
either  for  a  fixed  term  of  years  (or  for  the  after- 
lifetime  of  the  beneficiary  or  of  the  insured)  and 
at  the  expiration  of  the  period  (or  the  life)  will 
pay  the  principal  sum. 

When  the  rate  of  interest  is  that  which  the 
company  actually  uses  in  computing  its  pre- 
miums and  reserves,  this  policy  is  likely  to  be 
just  what  it  purports  to  be  and  the  premium  for 
$1,000  of  such  insurance  to  be  just  what  the  pre- 
mium for  the  same  amount  of  insurance,  paya- 
ble in  a  lump  sum,  would  be. 

But  when  the  rate  of  interest  guaranteed  is 
higher  than  the  rate  used  in  the  computations,  it 
means  that  the  additional  interest,  so-called,  is 


198  BUSINESS  OF  LIFE  INSURANCE 

provided  by  charging  a  premium  for  a  sufficient- 
ly larger  amount  of  insurance  to  furnish  this 
larger  annual  instalment. 

Very  few  companies  pay  over  any  surplus  in- 
terest which  is  earned  upon  the  funds  held  to 
provide  these  instalments  and  deferred  benefits 
above  the  rate  used  by  the  company  in  its  pre- 
mium and  reserve  computations;  but  some  of 
them  do. 

These  are  the  principal  forms  of  life  insur- 
ance; with  the  exception  of  semi-endowments 
and  double  endowments,  the  former  paying  half 
as  much  in  event  of  survival  as  in  event  of  prior 
death  and  the  latter  vice-versa;  they  may,  in- 
deed, be  called  the  only  forms. 

Notwithstanding  which,  the  public  is  led  to 
believe  that  there  are  almost  as  many  kinds  of 
life  insurance  policies  as  there  are  companies. 
Distinctive  names  like  Tontine,  Semi-tontine, 
Distribution,  Accumulation,  Dividend  Invest- 
ment, Dividend  Endowment,  etc.,  are  given 
them.  These  really  refer  solely  to  the  conditions 
as  to  time  and  method  of  surplus  distribution 
and  the  application  of  the  surplus.  Usually  they 
mean  merely  that  the  apportionment  of  surplus 
is  deferred  ten,  fifteen  or  twenty  years. 

At  the  close  of  these  periods  options  of  settle- 
ment are  given.  These  are  no  more  than  privi- 
leges to  apply  the  surplus  or  the  entire  cash 
valu^,  being  the  surplus  and  reserve,  to  pur- 


THE  EVOLUTION  OF  POLICIES   199 

chase  paid-up  insurance  or  a  life  annuity,  or  to 
withdraw  the  same  in  cash. 

Applicants  are  frequently  misled  by  the  quo- 
tation of  results,  including  surplus  accumula- 
tions, of  such  policies,  into  supposing  that  a 
twenty  payment  life  policy  or  even  a  whole  life 
policy,  with  a  twenty-year  surplus  period,  is  a 
twenty-year  endowment.  Under  such  policies 
the  guaranteed  cash  value  at  the  end  of  twenty 
years  is  merely  the  reserve  for  the  twenty  pay- 
ment policy  or  the  life  policy  as  the  case  may  be, 
always  much  less  than  the  face  of  the  policy,  and 
the  remainder  of  the  total  cash  value  quoted  is 
surplus  which  may  have  been  realised  in  the 
past,  but  is  no  earnest  for  the  future,  while  a 
twenty-year  endowment  policy  yields  a  guaran- 
teed return  of  the  face  of  the  policy,  besides  all 
the  surplus.  Purchasers  should  carefully  dis- 
tinguish, therefore. 

The  deferred  surplus  plans,  as  applied  to  en- 
dowment policies  with  the  same  periods,  reverse 
the  life  insurance  before  the  periods  are  com- 
pleted. That  is,  there  will  be  a  loss  instead  of  a 
gain  to  the  beneficiary  because  of  the  policy  on 
account  of  the  death  of  the  insured  during  the 
last  year  of  the  period.  For,  suppose  that  $300 
surplus  per  $1,000  has  been  realised  and  will  be 
payable  if  the  insured  survives  the  twenty  years 
and  maintains  the  policy  in  force ;  plainly,  if  he 
should  die  during  the  twentieth  year,  after  the 


200  BUSINESS  OF  LIFE  INSURANCE 

twentieth  annual  premium  has  been  paid,  and 
there  is  paid  to  the  beneficiary  only  $1,000,  the 
face  of  the  policy,'  there  is  a  loss,  instead  of  a 
gain,  because  5f  *the  transaction. 

The  loss  is  sometimes  guarded  against  by  add- 
ing a  return  premium  or  partial  return  premium 
feature,  of  course  increasing  the  premium  to 
cover  this.  In  consequejice,  if  death  occurs  dur- 
ing the  twentieth  year,  in  addition  to  paying  the 
principal  sum  to  the  beneficiary,  the  company 
also  pays  an  amount  equal  to  all  the  premiums 
received  or  one-half  or  one-third  of  the  pre- 
miums received,  as  the  case  may  be. 

Another  sort  of  modification  which  does  not 
really  make  the  insurance  a  new  kind,  is  when  a 
proportion  of  each  premium  is  not  paid  in  cash 
but  is  charged  against  the  policy  as  a  loan.  This 
gives  a  lower  cash  premium,  of  course.  The  plan 
is  very  old,  being  in  fact  the  guise  under  which 
life  insurance  by  mutual  companies  first  became 
popular  in  the  United  States.  It  was  attended 
by  two  features  which  made  the  results  unsatis- 
factory, viz.,  an  interest  charge  far  in  excess  of 
the  rate  used  by  the  company  in  computing  its 
premiums  and  reserves,  and  an  estimate  that 
annual  dividends  would  wipe  out  the  loans, 
which  estimate  was  not  realised.  The  result  was 
increasing  cash  cost  because  of  the  interest,  and 
decreasing  insurance  because  of  the  loans.  Not- 
withstanding which  objections,  the  plan  was 


THE  EVOLUTION  OF  POLICIES   201 

long  popular  and  many  strong  companies  were 
built  up  by  its  use. 

In  recent  years  the  same  principle  in  other 
forms  has  been  made  use  of,  both  in  Great  Brit- 
ain and  in  this  country.  In  Great  Britain  the 
*  *  discounted  bonus ' '  policy  has  been  introduced. 
Under  its  provisions  the  company  reduces  the 
annual  premium  by  the  amount  of  the  value  of 
its  expected  bonus — usually  declared  every  five 
years — commuted  into  an  annual  cash  payment. 
Should  the  company  be  unable  to  maintain  its 
rate  of  bonus,  there  must  be  a  readjustment, 
usually  either  by  increasing  the  premium  or  by 
diminishing  the  sum  insured. 

In  the  United  States,  under  the  name  ''ad- 
vanced dividend, ' '  the  idea  is  utilised  as  follows : 
A  certain  portion  of  each  premium  during  a 
deferred  dividend  period  is  advanced  by  the 
company  and  is  charged  against  the  policy  as  a 
loan;  interest  is  accumulated  against  this  at  a 
rate  stipulated  and  agreed  upon ;  in  event  of  the 
death  of  the  insured  during  the  period  this  ac- 
cumulation is  cancelled  by  a  return  premium 
feature,  and,  of  course,  if  the  premium  loans  are 
not  availed  of,  there  is  paid,  in  addition  to  the 
sum  insured,  the  amount  of  this  premium  re- 
turn ;  at  the  end  of  the  deferred  dividend  period 
the  accumulated  surplus  is  applied  to  wipe  out 
the  indebtedness  or  to  reduce  it,  if  not  sufficient 
to  pay  it  in  full. 


202  BUSINESS  OF  LIFE  INSURANCE 

It  should  be  borne  in  mind  that  the  policies 
which  contain  this  privilege  do  not  otherwise 
differ  from  other  forms,  except  in  the  return 
premium  feature.  It  may  be  applied  to  life, 
limited-payment  life  or  endowment  policies. 

In  considering  policies  with  this  loan  feature 
a  most  important  thing  that  ought  never  to  be 
neglected  is  to  ascertain  at  what  rate  of  interest 
the  loan  accumulates.  If  at  a  rate  exceeding 
materially,  if  at  all,  the  rate  used  by  the  com- 
pany in  its  computations,  and  especially  if  at  a 
rate  higher  than  is  secured  on  other  invest- 
ments, the  holders  of  these  policies  may  not  be 
fairly  treated. 

The  following  forms  of  annuities  are  offered 
by  American  companies : 

Immediate  life  annuities,  payable  at  the  end 
of  each  year,  half-year  or  quarter,  during  the 
annuitant's  lifetime.  Rates  for  these  are  quoted 
both  as  single  premiums  for  an  annuity  of  $100 
per  annum,  $50  per  half-year  or  $25  per  quarter, 
and  as  amounts  of  annuity,  payable  annually, 
semi-annually  or  quarterly,  which  $1,000  will 
purchase.  The  single  premiums  for  female  an- 
nuitants are  higher  than  for  males,  the  experi- 
ence having  been  that  female  annuitants  aver- 
age to  live  longer. 

These  annuities  are  usually  not  complete  or 
apportionable,  L  e.,  the  accrued  portion  of  the 
annuity  is  not  payable  in  case  the  annuitant  dies 


THE  EVOLUTION  OF  POLICIES   203 

before  completing  a  year,  half-year  or  quarter, 
as  the  case  may  be.  Such  is  required  by  the 
laws  of  Great  Britain,  but,  of  course,  a  higher 
premium  is  charged. 

The  premiums  for  annuities  are  computed  ac- 
cording to  mortality  tables,  deduced  from  ex- 
perience with  annuitants,  and  usually  3^  per 
cent,  interest.  The  mortality  is  lower  than 
among  insured  lives.  No  participation  in  the 
surplus  is  given. 

Immediate  joint  life  annuities,  payable  year- 
ly, half-yearly  or  quarterly  during  the  joint  lives 
of  two  or  more  persons.  These  cease  upon  the 
death  of  the  first  of  the  joint  annuitants. 

Immediate  last  survivor  annuities,  payable 
yearly,  half-yearly  or  quarterly  so  long  as  any 
one  of  the  annuities  survives. 

Deferred  life  annuities,  i.  e.,  beginning  after  a 
term  of  years.  This  may  be  applied  to  one  life, 
joint  life  or  last  survivor  annuities ;  but  is  usual- 
ly applied  to  the  first-named  and  only  as  an  ad- 
ditional feature  in  connection  with  a  life  insur- 
ance policy.  These  may  be  issued  with  return 
of  premiums  in  event  of  death  during  the  period 
before  the  annuity  commences,  or  without  such 
provision  or  with  such  provision,  including  also 
the  return  of  the  remainder  of  the  premiums 
paid,  if  death  occurs  after  the  annuities  com- 
mence, but  before  the  annuities  received  equal 
the  premiums  paid. 


204  BUSINESS  OF  LIFE  INSURANCE 

Survivorsliip  annuities,  already  described  in 
connection  with  continuous  instalment  life  in- 
surance. These  are  usually  paid  for  by  annual 
premiums  during  the  life  insured,  and  such  poli- 
cies are  issued  both  with  return  of  premiums  if 
the  beneficiary  dies  first  or  without  return,  the 
premium  for  the  former  being  the  larger,  of 
course. 

Increasing  life  annuities,  i.  e.,  starting  at  a 
given  payment  and  the  payment  increasing  each 
year  the  annuitant  survives,  usually  at  a  fixed 
amount  per  annum  or  by  arithmetical  progres- 
sion. This  form  has  usually  been  utilised  only 
in  connection  with  life  insurance  policies  as  fol- 
lows: An  annual  cash  payment  to  the  policy- 
holder equal  to  3  per  cent,  upon  all  premiums 
previously  paid.  Suppose  the  premium  is  $100 
per  annum,  this  would  call  for  a  payment  of 
$3.00  the  first  year,  $6.00  the  second,  etc.,  and 
after  thirty-three  years  these  payments  would 
exceed  the  annual  premium  and  yield  the  in- 
sured an  income  each  year  of  $2.00  the  thirty- 
fourth  year,  $5.00  the  thirty-fifth,  etc. 

The  following  forms  of  life  insurance  or  an- 
nuities have  also  been  offered,  viz. : 

Life  and  annuity,  giving  life  insurance  to  age 
70  and  premiums  ceasing  at  age  70,  when  an 
option  is  given  to  take  $1,000  paid-up  insurance, 
$100  life  annuity,  or  $500  paid-up  insurance  and 
$50  life  annuity.    The  point  is  that  at  age  70  a 


THE  EVOLUTION  OF  POLICIES   205 

life  annuity  of  $100  and  a  paid-up  life  insurance 
of  $1,000  are  nearly  of  equal  value. 

Widows'  annuity,  giving  an  annuity  to  the 
widow  during  her  widowhood  (in  event  of  her 
death,  to  their  children  during  their  minority), 
in  event  of  the  death  of  the  husband,  an  annuity 
for  ten  jears  being  paid  in  any  case.  This  has 
so  far  been  offered  only  by  assessment  societies. 
To  compute  proper  rates  of  premium  for  all  the 
contingencies,  so  as  to  satisfy  the  requirements 
of  the  legal  reserve  laws,  would  not  be  easy. 

A  contract  to  deliver  fractional  paid-up  poli- 
cies upon  the  payment  of  each  premium.  By 
one  of  the  largest  companies  this  is  applied  to  a 
guaranteed  interest  bond  only,  and  the  first 
paid-up  policy  is  delivered  only  upon  the  pay- 
ment of  the  second  annual  premium,  the  second 
upon  payment  of  the  third  annual  premium,  etc., 
two  paid-up  policies  being  delivered  upon  pay- 
ment of  the  twentieth  annual  premium.  Thus 
the  company  holds  itself  in  position  to  forfeit 
one  premium  upon  discontinuance.  Another 
company  applies  this  to  limited  premium  poli- 
cies, actually  delivering  one  proportionate,  frac- 
tional paid-up  policy  upon  the  payment  of  each 
premium.  Under  both  plans  it  is  agreed  that  in 
event  of  the  death  of  the  insured  all  the  paid-up 
policies  are  to  be  delivered  at  once. 


CHAPTER  XXI 

EEBATIJSTG,  LOCAL  BOARDS  AND  STOCK  WITH  POLICIES 

There  are  inducements  offered  to  purchasers 
of  life  insurance  at  times  which  do  not  fairly- 
come  within  the  designation  '^  varieties  of  poli- 
cies, ' '  but  to  which,  notwithstanding,  a  place  in 
this  series  of  articles  is  due  on  the  ground  of 
their  importance.  They  may  be  denominated 
** schemes"  as  the  title,  which  is  all-embracing, 
and  not  as  a  mere  epithet  of  opprobrium.  For 
they  are  of  very  unequal  merit  and  some  of  them 
deserve  respectful  attention,  though  all  should 
be  examined  with  great  caution. 

An  offer  of  a  rebate  off  the  first  year's  pre- 
mium is  easily  first  in  importance  of  these 
schemes.  It  is  very  seductive,  too,  either  when 
one  is  first  approached  in  this  way  or  when  he 
is  approached  with  such  an  offer  that  a  single 
year's  protection  for  a  large  amount  will  cost 
but  a  trifle. 

The  rebate  made  its  appearance,  as  wb  have 
seen  already,  in  the  form  of  a  commission  or 
''tip"  to  the  applicant's  attorney,  even  before 


REBATING  AND  OTHER  SCHEMES  207 

life  insurance  agents  were  known.  It  was  quite 
as  willingly  given  to  the  applicant  himself  when 
he  was  wise  enough  to  call  for  it. 

Later,  when  agents  came  into  the  arena,  the 
rebate  became  a  convenient  weapon  by  means  of 
which  to  enlist  the  influential  men  in  the  com- 
munity— nearly  always  looking  for  the  main 
chance  and  an  advantage  over  their  neighbours. 
It  was  moderate  in  amount  because  the  agent's 
commissions  were  moderate. 

When  the  pressure  for  higher  and  higher 
brokerages  caused  the  American  companies  to 
exceed  the  provision  for  expenses  in  the  first 
year's  premiums  in  its  payment  of  brokerages, 
the  largest  American  company  undertook  to 
head  off  this  stroke  of  enterprise  by  openly 
offering  a  rebate  to  every  applicant.  It  raised 
a  storm  and  was  the  subject  of  legislative  in- 
vestigation and  interference.  The  following  are 
some  of  the  company's  explanations  and  at- 
tempts at  justification : 

''When  the  number  of  lapses  and  surrenders 
grew  to  such  proportions  as  to  make  it  evident 
that  the  loss  of  contributing  members  must  some 
day  be  repaired  by  the  introduction  of  new  lives 
at  more  than  average  cost,  a  fund  was  created 
from  the  retiring  members,  to  which  the  exist- 
ing policyholders  have  not  contributed,  and 
which  is  now  made  available,  and  will  be  used 
for  the  purpose  intended.    The  m.oney  contrib- 


208  BUSINESS  OF  LIFE  INSURANCE 

uted  by  the  existing  members  is,  consequently, 
not  taxed  for  the  benefit  of  new  entrants,  as 
might  otherwise  be  supposed,  and  the  foresight 
of  the  management  is  made  apparent.  The  ben- 
efit to  existing  members  will  be  in  the  enhanced 
addition  to  their  dividends  resulting  from  the 
infusion  of  new  lives  and  the  corresponding 
diminution  of  the  average  death  rate  thereby. 
In  presenting  this  matter  to  the  public  do  not 
fall  into  the  error  of  representing  it  as  a  dis-. 
count,  rebate  or  dividend  in  advance.  No  divi- 
dend is  ever  declared  or  paid  by  the  company  in 
advance.  No  charge  is  made  against  the  policy 
or  policyholder  for  any  part  of  the  premium, 
and  the  whole  of  it  is  cash  to  the  company  with- 
out really  doing  so.  *  *  *  But  for  the  con- 
stant introduction  of  new  lives,  as  above  stated, 
the  dividends  must  necessarily  decrease.  It  is, 
therefore,  to  the  pecuniary  interest  of  the  exist- 
ing policyholders,  that  their  money  should  be 
used,  within  reasonable  limit,  for  the  constant 
procurement  of  new  business.  How  this  should 
be  done  is,  however,  a  question  in  which  they  are 
deeply  interested.  Two  methods  have  been  fol- 
lowed by  sound  and  trustworthy  companies. 
One  is  to  pay  large  commissions  to  agents  to 
stimulate  them  to  greater  activity  in  soliciting. 
The  other  is  to  allow  a  portion  of  the- premium 
to  the  applicant  as  an  inducement  to  present 
himself  for  insurance.    Both  plans  in  combina- 


REBATING  AND  OTHER  SCHEMES  209 

tion  have  been  also  used  in  life  insurance,  and 
in  fire  insurance  the  allowance  of  a  rebate  to  the 
insured  is  almost  universal.  ♦  *  ♦  The  Mu- 
tual Life  Insurance  Company  of  New  York  has 
always  opposed  the  payment  of  large  commis- 
sions to  agents,  and  if  it  has  not  hitherto  made 
use  of  its  financial  strength  to  offer  any  induce- 
ments to  the  insurant  it  has  not  been  because 
there  was  any  moral  or  prudential  objection,  but 
because  the  appreciation  of  the  public  sufficed 
without  it. ' ' 

In  consequence  of  the  outcry  the  company  de- 
sisted, but,  instead  of  thus  lowering  the  first 
premium,  it  proceeded  to  reduce  both  first  and 
renewal  premiums,  hoping  thus  to  divert  the 
purchasers  of  life  insurance  from  high  premium 
policies,  with  a  high  expense  rate  and  great  ex- 
pectations as  to  deferred  dividends,  to  low  pre- 
miums, with  low  expenses  and  reasonable  re- 
turns. The  experiment  was  not  wholly  success- 
ful, possibly  because  not  persisted  in  long 
enough. 

As,  by  reason  of  the  returns  being  much  lower 
than  had  been  estimated,  the  popularity  of  de- 
ferred dividend  policies  with  harsh  forfeiture 
conditions  began  to  wane,  and  as  the  race  for 
new  business  became  more  strenuous,  commis- 
sions were  forced  up  and  up,  until  rebating  of 
quite  another  sort  became  common. 

It  was — and  sometimes  yet  is — of  the  follow- 


210  BUSINESS  OF  LIFE  INSURANCE 

ing  character :  The  company  offers  a  very  large 
bonus  for  a  certain  amount  of  new  business.  If 
the  bonus  is  earned  the  profit  to  the  agent  on  all 
the  business  effected  is  so  much  increased  that 
he  can  afford,  if  necessary,  to  pay  very  large 
commissions  for  much  of  the  business — and 
quite  as  well  and  with  more  effect,  to  give  the 
same  commissions  to  the  insured  as  a  rebate. 
This  results  in  a  great  deal  of  life  insurance  be- 
ing sold  at  certain  times  for  premiums  which 
are  merely  nominal. 

There  is  compensation  in  all  things.  So  far 
as  the  companies  are  concerned  which  enable 
these  rebates  to  be  offered,  the  purchaser  of  life 
insurance  will  discover,  if  he  looks  up  the  rela- 
tive rates  of  premium  in  them  and  in  others 
which  pay  too  small  a  commission  to  admit'  of 
it,  and  the  dividends  paid  and  surrender  values 
promised  by  both  classes,  that  he  would  be 
robbed  if  he  failed  to  get  the  rebate  and  that,  if 
he  does  get  it,  he  will  give  more  than  a  quid  pro 
quo  in  many  ways. 

In  order  to  avoid  curing  this  evil  by  the  only 
effectual  method,  the  abandonment  of  high 
brokerage  commissions  and  bonuses,  companies 
and  agents  have  induced  Legislatures  to  pass 
laws  prohibiting  rebating,  which  they  call  **  dis- 
criminating between  persons  of  the  same  age, 
class  and  expectancy  of  life. ' '  These  laws  have 
in  the  main  been  dead  letter  statutes.  Only  rival 


REBATING  AND  OTHER  SCHEMES  211 

agents  or  companies  are  interested  in  their  en- 
forcement. They  seldom  take  action.  The  only 
sentiment  the  average  policyholder  harbours 
when  he  learns  that  his  neighbour  has  secured  a 
rebate  is  anger  that  he  himself  failed  to  get  one. 

Lower  premiums'  and  better  returns  are  al- 
most inevitably  found  in  companies  which  do 
not  give  their  agents  commissions  high  enough 
to  enable  them  to  rebate. 

An  ingenious  method  of  appearing  to  rebate, 
without  really  doing  so,  was  once  put  out  by  a 
leading  company  and  is  yet  used  by  two  or  three 
small  companies.  The  company  offered  a  pre- 
mium for  the  first  two  years,  combined,  much 
smaller  than  the  sum  of  two  annual  premiums. 
The  surrender  values  were  correspondingly  re- 
duced, however,  and  there  was  really  no  advan- 
tage at  all. 

Another  scheme  is  known  as  the  "board 
plan. ' '  It  consists  in  placing  a  large  amount  of 
insurance  with  persons,  as  influential  as  possi- 
ble, who  are  appointed  members  of  "advisory 
boards, ' '  and  among  whom  a  certain  portion  of 
the  premiums  received  is  divided  annually  as  a 
commission.  The  purpose  is,  first  of  all,  to 
secure  as  much  business  as  possible,  as  expedi- 
tiously as  possible,  from  the  board  members 
themselves,  and  then  to  utilise  their  introduc- 
tions and  recommendations  to  obtain  other 
members. 


212  BUSINESS  OF  LIFE  INSURANCE 

On  this  plan  new  business  has  been  secured,  in 
point  of  fact,  at  a  lower  outlay  than  without  re- 
sort to  it.  Theoretically,  it  is  meritorious.  The 
''board"  charges  are  often  less  than  renewal 
commissions.  If  the  board  members  really  con- 
tinued to  assist  the  company,  if  their  expecta- 
tions were  witliin  reason  and  if  the  work  were 
followed  up  with  enterprise  and  the  scheme 
faithfully  and  fairly  carried  out,  it  might  be  un- 
objectionable. 

Instead,  the  thing  is  accomplished  in  almost 
all  cases  by  excessive  estimate  of  possible  re- 
sults and  by  uniting  with  these  estimates  illus- 
trations of  policy  results,  so  that  premium  pay- 
ment is  assumed  on  the  basis  of  reliance  on  these 
estimates.  When  disappointed,  the  board  mem- 
bers become  dissatisfied  and,  instead  of  aiding 
the  company,  they  discredit  it  and  refuse  to 
recommend  its  policies.  The  company  is  thus 
prevented  from  following  up  the  canvass,  if,  in- 
deed, it  ever  had  such  a  notion.  In  consequence, 
after  a  time,  the  payment  of  the  commissions  to 
the  board  becomes  onerous  and  attempts  are 
made  to  get  rid  of  it  or  to  put  a  narrow  construc- 
tion upon  the  contract. 

The  first  application  of  the  ''board  plan"  on 
a  large  scale  was  about  thirty  years  ago.  A  very 
large  growth  in  a  very  short  time  was  the  result. 
The  first  superintendent  of  insurance  for  New 
York,  then  out  of  ofiice  and  practising  as  a  con- 


REBATING  AND  OTHER  SCHEMES  213 

suiting  actuary,  was  much  impressed  by  the 
achievements  of  the  company  through  this 
scheme.  In  a  pamphlet  printed  in  1871  he  show- 
ed that  in  only  two  years  and  six  months  it  had 
resulted  in  a  business  in  force  of  over  $46,000,- 
000.  This  is  a  record  still  unrivalled ;  yet  within 
seven  years  this  company  was  forced  out  of 
business  by  the  utter  breakdown  of  its  own  sys- 
tem. 

When  the  renaissance  of  new  life  insurance 
companies  set  in,  from  1890  to  1895,  this 
scheme  was  revived.  There  have  been  some 
failures  under  it  and  several  failures  to  reap 
the  expected  harvest,  either  for  company  or 
for  board  members,  but  some  companies 
have  apparently  overcome  the  obstacles  and 
achieved  success  which  bids  fair  to  be  per- 
manent. 

Partly  the  complaints  of  disappointed  board 
members,  but  mainly  the  outcry  of  competing 
agents  and  companies,  have  caused  some  State 
commissioners  to  look  upon  the  ''board  plan" 
as  a  thing  to  be  suppressed.  Accordingly,  the 
scheme  has  in  some  States  been  condemned  as 
an  infraction  of  the  anti-discrimination  law. 
This  has,  however,  been  so  doubtful  that  in  one 
State  the  Attorney-General  gave  his  opinion 
one  way  and  his  successor  reversed  it. 

The  following  is  a  specimen  of  the  absurd 
estimates ; 


214  BUSINESS  OF  LIFE  INSURANCE 


Year. 
1 

Amount  of 

Policy 
$5,000  Guar 
Loan  Value 

'.  Premium. 

130.30 

Contract 

Earnings 

Estimated. 

Cash  Excaes 
Net                of 
Cost.       Premium. 

130.30 

2 

130.30 

5.60 

124.70 

3 

125 

130.30 

12.00 

118.30 

4 

190 

130.30 

21.08 

109.22 

5 

260 

130.30 

33.13 

97.17 

6 

325 

130.30 

48.80 

81.50 

7 

400 

130.30 

67.74 

62.56 

8 

470 

130.30 

88.41 

41.89 

9 

545 

130.30 

112.22 

18.08 

10 

625 

130.30 

138.10 

7.80 

11 

705 

130.30 

166.00 

35.70 

12 

785 

130.30 

162.95 

32.65 

13 

870 

130.30 

160.55 

30.25 

14 

955 

130.30 

157.91 

27.61 

15 

1040 

130.30 

155.07 

24.77 

16 

1130 

130.30 

152.26 

21.96 

17 

1220 

130.30 

149.66 

19.36 

18 

1310 

130.30 

145.71 

15.41 

19 

1405 

130.30 

144.36 

14.06 

20 

1500 

130.30 

143.30 

13.00 

Totals...  2606.00    2064.83       783.72    242.57 

Settlement  options  at  end  of  twenty  years : 

1  Cash  value $3295.00 

Consisting  of  cash  guaranteed 1500.00 

Surplus  estimated 1795.00 

2  Equivalent  in  paid-up  policy 5825.00 


EEBATING  AND  OTHER  SCHEMES  215 

Another  scheme  which  has  been  employed 
within  a  few  years  past,  only,  is  to  offer  stock  in 
the  company  for  sale  in  connection  with  its  poli- 
cies. Obviously,  this  is  a  thing  which  can  best 
be  done  by  a  new  or  young  company,  or,  in 
any  event,  in  introducing  a  company  in  a  given 
State  or  vicinity.  If  a  small  amount  of  stock 
were  sold  to  each  purchaser  of  a  policy  as  a 
permanent  practice  the  stock  returns  would 
necessarily  be  small  and  the  speculation  unat- 
tractive. 

No  argument  is  required  to  show  that  it  is  to 
the  advantage  of  the  new  and  small  company, 
and,  indeed,  to  any  company,  in  organising  a 
new  field  to  enlist  as  many  of  the  most  influential 
men  as  possible.  To  secure  them  as  stockhold- 
ers is  the  most  effectual  way  to  accomplish  this 
and  also  the  fairest,  for  they  then  pay  directly 
and  in  full  for  the  interest  which  they  possess. 
With  their  money  actually  invested  in  the  stock 
of  the  company,  they  are  openly  concerned  in  its 
welfare  and  success  and  can  with  perfect  pro- 
priety invite  their  friends  and  acquaintances  to 
patronise  a  company  in  which  they  are  inter- 
ested. 

It  has  been  found  that  the  agents  of  a  new  and 
small  company  can  earn  a  better  income  at  a 
lower  rate  of  commission  when  introducing  the 
company  into  a  new  field  if  the  stock  is  offered 
with  the  policies.    By  doing  this,  therefore,  the 


216  BUSINESS  OF  LIFE  INSURANCE 

company  secures  increased  capital  and  valua- 
ble influences  in  its  behalf,  not  only  with- 
out expending  more  for  commissions  upon 
new  premiums,  but  actually  with  greater 
economy.  With  the  allotment  of  stock  safely 
disposed  of,  if  the  work  has  been  done  well, 
there  should  be  an  abiding  aid  to  secure 
new  business  in  these  localities  in  the  per- 
sistent interest  of  these  stockholders  in  the 
work. 

Stock  in  agency  companies  or  in  an  invest- 
ment company  which  promotes  the  life  insur- 
ance company  is  also  sometimes  offered  in  a 
similar  manner.  The  purpose  in  such  case  is  to 
secure  money  to  pay  current  expenses  and  to 
develop  the  business. 

There  is,  of  course,  no  legal  impropriety  in 
this  sale  of  stock  and  policies  together,  whether 
it  be  stock  in  the  life  insurance  company  or  in 
an  agency  or  investment  company.  Precisely 
how  it  will  work  out  is  a  question  which  will 
doubtless  be  answered  differently  in  different 
companies. 

The  following  is  a  specimen  of  grossly  im- 
proper estimates  of  dividend  returns  upon 
stock,  united  also,  it  will  be  noted,  with  illustra- 
tions of  policy  results : 

Guarantees  and  estimates  on  a  $10,000  ordi- 
nary life  policy,  with  stock,  on  a  life,  age  47, 
twenty-year  settlement : 


REBATING  AND  OTHER  SCHEMES  217 

$416.10 — premium. 
20 — years. 
$8,322.00— paid  in  on  policy. 

$460.00 — paid  in  on  stock. 
$8,782.00 — total  paid  in  to  company. 

Value  in  cash : 

Guaranteed  value  of  policy $4,370.00 

Dividend  value  of  policy 4,990.00 

Estimated  value  of  stock 10,000.00 

Dividend  value  of  stock 2,000.00 

Total  value  of  policy  and  stock  and 
insurance  for  twenty  years $21,360.00 

What  has  made  the  most  trouble  in  connection 
with  the  ''board  plan"  and  this  plan  of  selling 
stock  with  policies,  has  been  the  making  of  ex- 
travagant estimates  of  probable  profits.  In  both 
cases  anything  like  reliable  estimates  are  quite 
impossible.  All  that  are  given  are  practically 
sure  to  be  exaggerated.  Honesty  of  manage- 
ment calls  for  a  total  suppression  of  these  esti- 
mates, the  fact  being  that  nothing  about  it  can 
be  foretold. 


CHAPTER  XXII 


All  of  the  schemes  so  far  mentioned,  it  will 
be  observed,  have  been  used  to  secure  for  the 
companies  the  patronage  and  support  of  men 
who  are  deemed  influential  in  the  community. 
The  rebate  was  the  oldest  of  them,  freely  resort- 
ed to  by  the  larger  and  more  enterprising  of  the 
companies.  Some  of  these  also  made  use  of  the 
"board  plan,"  when  they  were  younger  and 
smaller.  The  scheme  of  local  boards  and  the 
scheme  of  selling  stock  with  policies  have,  how- 
ever, been  the  resort  of  new  and  small  compa- 
nies. Each  of  them  is  susceptible  of  great 
abuses,  rebating  of  degeneration  into  giving 
business  away,  and  the  others  of  the  abuse  of  ex- 
travagant estimates,  amounting  to  fraudulent 
misrepresentation ;  but,  as  competitive  business 
devices,  there  is  little  to  say  against  any  of  them 
when  not  abused,  and  in  point  of  fact  legislative 
or  departmental  interference  with  them  has 
originated  in  practically  every  case  with  rival 
companies  or  agents  who  have  found  the  com- 
petitive advantage  thus  transferred  to  other 

218 


•'DATING  BACK"  AND ''BONDS"    219! 

companies.  Wlien  purchasers  of  life  insurance 
from  a  company  discover  that  others  have  re- 
ceived a  rebate,  their  resentment  is  solely  that 
they  did  not  also  get  in  ''on  the  ground  floor," 
and  so,  too,  as  to  the  "board  plan."  In  the  case 
of  stock  purchases  there  is  not  even  this  to  com- 
plain about;  the  stock  interest  was  bought  and 
paid  for. 

Two  schemes  remain  to  be  considered  which 
are  wholly  and  per  se  vicious,  and  one  of  which 
is  unconscionable  and  even  fraudulent  in  its  es- 
sential nature. 

The  first  is  the  "dating  back"  scheme.  The 
company  offers  an  alluring  proposition  of  the 
following  nature :  A  twenty  payment  life  pol- 
icy, dated  back  seven  years ;  a  certain  amount, 
less  than  the  seven  premiums  would  amount  to, 
but  much  more  than  the  reserve  that  would  have 
been  accumulated,  to  be  paid  as  commutation  of 
the  forborne  premiums;  instead  of  being  paid, 
this  may  stand  against  the  policy,  accumulating 
at  interest,  usually  at  a  higher  rate  than  is  used 
in  computing  the  net  premiums  and  reserves; 
according  to  some  policies,  in  event  of  death  be- 
fore the  completion  of  the  payment  period,  this 
cliarge  is  cancelled  by  a  return  premium  feature, 
for  which  a  small  extra  premimn  is  collected ;  an 
illustration  of  results  on  the  basis  of  what  other 
companies  have  accumulated  during  an  entire 
period  of  twenty  years. 


220  BUSINESS  OF  LIFE  INSURANCE 

Were  this  scheme  otherwise  fair,  i.  e.,  were 
the  charge  the  exact  amount  of  the  reserve,  the 
interest  the  rate  used  in  computing  reserves  and 
the  illustration  based  on  thirteen  years '  accumu- 
lation, still  it  would  not  be  advantageous  to  the 
insured,  who  would  be  getting  no  better  bargain 
than  by  the  usual  forms.  The  larger  charge  than 
the  reserve  enables  the  company  to  use  the  next 
two  or  three  annual  premiums  for  expenses  and 
current  claims,  thus  really  reducing  the  accumu- 
lation term  to  eleven  or  even  to  ten  years;  the 
higher  interest  charged  is  by  so  much  to 
the  insured's  disadvantage,  and  the  use  of 
these  estimates  or  illustrations  is  a  fraud  of 
itself. 

The  scheme  was  earliest  employed  in  transfer- 
ring the  members  of  a  reorganised  society  from 
the  assessment  plan  to  level  premium  plans.  By 
means  of  it  the  management  succeeded  in  get- 
ting nearly  all  the  accumulations  of  the  assess- 
ment policies,  plus  the  first  two  or  three  years' 
premiums  on  the  substituted  policies,  as  paid, 
into  the  surplus  account  and  available  for  ex- 
penses, remuneration  of  officers,  etc. 

It  proved  so  delusive  and  so  attractive  a 
dodge  that  it  was  taken  up  by  several  other  con- 
cerns, for  the  most  part  with  headquarters  in 
Indiana,  and  has  been  employed  freely  to  secure 
new  applications  for  insurance.  The  following, 
much  resembling  the  stories  of  discretionary 


* '  DATING  BACK ' '  AND  ' '  BONDS ' '    221 

pool  rascals  and  others,  is  a  sample  of  the  fig- 
ures given  to  sell  this  scheme : 

Present  age  40,  policy  written  as  of  age 

33  years $5,000.00 

Annual  premium  age  33,  $167.00  for 

seven  years  equal 1,169.00 

If  policy  had  been  taken  seven  years 

ago  the  interest,  5  per  cent.,  equals . .      250.00 

The  applicant  has,  therefore,  retained 
in  his  own  possession. 1,419,00 

This  company  accepts  a  policy  loan 
agreement  in  pajTuent  of  the  first 
seven  annual  premiums  for 797.50 

The  amount  saved  on  day  of  making 
application 621.50 

A  twenty  payment  life  policy  at  age  40 
would  cost  $197.00  per  year  for  twen- 
ty years,  amounting  to  a  total  cost  of  3,940.00 

At  age  33  the  annual  premium  is 
$167.00,  and  this  amount  paid  for 
thirteen  years  equals 2,171.00 

Guaranteed  saving  in  cost,  therefore, 
being  1,760.00 

If  applicant  so  desires  the  company 
will  issue  a  policy  guaranteeing  to 
pay  the  amount  of  the  *' Policy  Loan 
Agreement,"  with  interest  thereon, 
should  death  occur  within  thirteen 
years 250.36 


222  BUSINESS  OF  LIFE  INSURANCE 

The  net  guaranteed  saving  then 
amounting  to $1,518.62 

OPTIONS  THIRTEEN  YEARS  FROM  DATE. 

Guaranteed  reserve   on   deposit  with 

State  of  Indiana $2,579.75 

Draw  amount  of  surplus  accumulations 
in  cash  estimated  after  paying  loan 
$797.50  and  interest  to  be 634.81 

Total  estimated  cash  value $3,214.50 

SECOND  OPTION. 

Draw  surplus  as  above $634.81 

Receive  paid-up  policy 5,000.00 

Total  cash  surplus  and  paid-up  insur- 
ance   $5,634.81 

The  preliminary  term  device  was  introduced 
in  the  United  States  by  a  regular  company  in 
1894.  The  company  had  its  headquarters  in 
Iowa.  The  policies  had  scarcely  been  printed 
when  a  life  insurance  agent  living  in  Iowa  de- 
vised a  scheme  as  follows : 

A  ten  year  investment,  guaranteed  value.  .$300 
Estimated  surplus 300 

Total  returns $600 


**DATING  BACK"  AND  ^'BONDS''    223 

Cost,  $2.50  per  month. 

Insurance,  $150  if  death  occurs  in  first  five 
years ;  $300  if  in  second  five  years. 

All  the  first  year's  premium  for  term  insur- 
ance for  one  year,  i.  e.,  for  current  expense  and 
risk. 

Out  of  each  premium  for  the  subsequent  nine 
years,  reserve  enough  to  accumulate  at  4  per 
cent.,  annually  compounded,  to  $300  at  end  of 
period.    This  called  for  about  $2.30  per  month. 

Remainder  of  each  premium  for  the  subse- 
quent nine  years,  for  current  expense  and  risk. 

The  first  year's  premium  and  the  margin  in 
the  subsequent  premiums  were  by  the  contract 
made  the  sole  property  of  the  stockholders. 

This  contract  was  plainly  unconscionable  for 
two  reasons.  First,  because  it  exacted  a  pre- 
mium for  one  year  term  insurance  at  the  rate  of 
$30  for  $150  insurance  or  $100  for  $500  insur- 
ance for  a  single  year.  Second,  because  almost 
all  the  sources  of  profit  in  the  subsequent  pre- 
miums above  4  per  cent,  guaranteed,  which  bare- 
ly caused  the  policyholder  to  realise  the  amount 
he  paid  in  premiums,  were  taken  from  the  in- 
sured by  the  agreement,  while  he  was  privately 
assured  that  there  would  be  a  large  gain. 

It  was  fraudulent,  also,  because  of  the  out- 
rageous misrepresentations,  \nz.,  of  a  profit  of 
100  per  cent.,  i.  e.,  $300  on  a  $300  contract,  or 
$1,000  on  a  $1,000  contract,  in  ten  years.    Had 


224  BUSINESS  OF  LIFE  INSURANCE 

all  the  profits  been  reserved  to  the  insured,  ac- 
cording to  experience  already  well  known  to  in- 
surance men  before  this  scheme  was  introduced, 
the  gains  would  not  have  been  more  than  one- 
fifth  the  estimate.  Manifestly,  too,  the  scheme 
could  not  have  been  sold  without  excessive  esti- 
mates. 

This  concern  was  not  molested  for  a  long  time 
and  prospered  exceedingly,  the  stockholders 
reaping  large  returns.  Other  companies  were 
organised  on  similar  lines,  excepting  that  they 
made  the  insurance  only  20  per  cent,  more  than 
the  premiums  paid,  thereby  charging  for  one 
year's  insurance  at  the  rate  of  $100  for  $120 
protection. 

Later  the  estimates  were  reduced  to  the  ''con- 
servative" proportions  of  $200  on  a  $300  con- 
tract. The  gains  could  not  have  exceeded  $50 
to  $75  at  the  most,  in  point  of  fact. 

For  years  these  companies  continued  undis- 
turbed. Prominent  and  influential  men  were 
connected  with  the  first  of  them,  men  of  even 
greater  social  and  political  distinction  with  the 
second,  which  had  for  its  president  no  less  a 
figure  than  the  then  Governor  of  Iowa,  after- 
ward Secretary  of  the  Treasury  of  the  United 
States.  Scandal  began  to  brew.  Rumour  had  it 
that  the  purpose  of  the  Attorney-General  of 
Iowa  to  suppress  these  frauds  was  thwarted  by 
the  Governor-president.   Later  and  before  his 


' '  DATING  BACK ' '  AND  ' '  BONDS ' '    225 

selection  for  the  greater  office,  he  resigned  as 
president  of  the  company,  and  not  long  after- 
wards an  investigation  by  the  insurance  depart- 
ment of  a  neighbouring  State  pricked  the  bubble. 
Then  both  companies  reinsured  and  retired  their 
stock,  the  managers  escaping  without  punish- 
ment and  with  the  spoils.  Iowa  by  new  laws  and 
rulings  purged  herself  so  that  now  such  things 
cannot  be  done  there  and  many  other  States 
closed  their  doors  to  it.  A  few  yet  indulgently 
permit  this  business  to  be  carried  on  by  life  in- 
surance concerns,  however,  and  both  because  of 
that  and  also  because  a  like  business  is  now  be- 
ing promoted  by  a  so-called  banking  corpora- 
tion, we  are  by  no  means  out  of  danger.  Recently 
this  plague  has  extended  to  Great  Britain  and  is 
raging  there,  much  to  the  discomfiture  of  Brit- 
ons, who  had  serene  confidence  in  the  sanity  and 
prudence  of  their  countrymen. 


CHAPTER  XXin 

LIFE  INSURANCE  AS  AN  INVESTMENT 

The  gross  impropriety,  amounting  to  fraud, 
of  the  so-called  ''investment  bonds,"  issued 
first  by  certain  Iowa  companies,  lias  been  point- 
ed out ;  but  as  a  preparation  for  considering  life 
insurance  as  an  investment  and  also  because 
these  contracts  were  held  forth  as  desirable  on 
investment  grounds  alone,  it  will  be  worth  while 
to  analyse  them  more  thoroughly.  The  main 
features  were : 

Benefits  to  the  insured,  life  insurance  of  $500 
the  first  five  years  and  $1,000  the  second  five 
and  the  return  of  $1,000  guaranteed — just  the 
sum  paid  in — plus  earnings,  at  the  end  of  ten 
years. 

The  benefits  to  stockholders,  including  pro- 
vision for  expense  and  mortuary  cost,  were  the 
whole  of  the  first  year's  premium  and  about  7 
per  cent,  from  each  subsequent  premium. 

The  endowment  benefit  at  the  end  of  ten 
years,  i.  e.,  the  return  of  the  premiums  paid, 
represents  all  that  the  investment  yields,  if  the 

226 


AS  AN  INVESTMENT  227 

funds  earn  4  per  cent,  per  annum  and  no  more. 
That  is,  on  that  basis,  the  insured  exchanges  for 
the  insurance  furnished,  the  entire  interest  upon 
his  payments.  In  practice,  the  participation  be- 
cause of  interest  over  4  per  cent,  and  forfeitures 
and  surrender  charges,  would  yield  some  return, 
thus  reducing  the  cost  of  the  insurance  by  so 
much. 

The  height  of  absurdity  was  attained  in  con- 
nection with  these  contracts,  when  only  120  per 
cent,  of  the  premiums  paid  was  the  amount  pay- 
able at  death.  In  effect  the  policyholder  was 
giving  up  the  interest  on  his  investment  in  ex- 
change for  this  merely  nominal  protection. 

The  incidence  of  the  expense  and  profit  pro- 
visions in  the  contracts  was  an  offence  against 
common  honesty,  for  on  these  ten-year  invest- 
ment undertakings  it  amounted  to  permitting 
the  company  to  apply  the  first  moneys  received, 
as  its  profits,  before  it  had  performed  its  en- 
gagement at  all. 

But,  had  the  incidence  been  fair  and  had  the 
insurance  been  the  face  of  the  policy,  instead  of 
a  less  sum  for  much  of  the  period,  the  amount  of 
the  provision  would  have  been  unfair  at  most 
ages.  We  have  seen  that  the  usual  loading  on 
ten-year  endowment  premiums  seems  to  be  un- 
fair, especially  at  the  younger  ages. 

As  compared  with  investments  which  do  not 
also  embrace  life  insurance,  investments  in  lifd 


228  BUSINESS  OF  LIFE  INSURANCE 

insurance  policies  must  always  be  at  a  disad- 
vantage, unless  a  fair  allowance  is  made  for  tlie 
value  of  the  protection.  This  is  often  lost  sight 
of,  and,  in  fact,  such  a  showing  is  frequently 
made  of  the  results  of  endowment  policies  as 
may  cause  them  to  be  considered  as  investments 
pure  and  simple.  Sometimes  the  insurance  is 
spoken  of  as  being  ' '  thrown  in  " ;  usually  the  in- 
vestment returns  are  cited  ''besides  the  insur- 
ance." All  this  is  unfortunate,  both  because  it 
creates  a  wholly  erroneous  impression  and  also 
because  it  cheapens  in  men's  estimation  the 
value  of  life  insurance. 

These  returns  of  from  3  per  cent.,  annually 
compounded  to  perhaps  4  per  cent,  ''besides  the 
insurance,"  are  of  the  past.  They  belong  to  a 
period  when  the  companies  realised  nearer  6 
per  cent,  than  4  per  cent.,  as  at  present.  Also  to 
a  period  when  forfeitures  were  acquiesced  in  by 
the  insured  and  yielded  large  apparent  gains. 
The  future  holds  forth  no  such  promises;  if 
when  6  per  cent,  was  earned,  only  4  per  cent,  or 
less  could  be  earned  net,  "besides  the  insur- 
ance," when  only  4  per  cent,  or  less  is  earned, 
net  investment  returns  will  be  2  per  cent,  or 
less. 

The  tontine  delusion,  i.  e.,  that  large  gains 
would  be  reaped  from  forfeitures,  fostered  the 
view  that  life  insurance  policies  might  be  de- 
sirable investments  for  investment's  sake,  not 


AS  AN  INVESTMENT  229 

considering  the  insurance  at  all.  It  even  caused 
life  and  limited  payment  life  policies  to  be  car- 
ried for  investment  purposes.  And  the  desire 
for  accumulation  and  its  benefits  has  kept  these 
policies  in  demand,  long  after  these  expectations 
have  been  disappointed. 

In  these  days  comparatively  few  statements 
of  results  are  given  without  at  least  referring 
to  the  value  or  the  cost  of  the  life  insurance. 
This  is  encouraging,  but  it  does  not  go  far 
enough. 

The  fact  is  that  the  investment  policies  of  the 
companies,  including  even  the  limited-payment 
life  policies,  could  be  and  should  be  better  in- 
vestment contracts  than  they  are.  For  in  nearly 
every  case  it  will  be  found  that  they  are  handi- 
capped by  an  unduly  large  loading  upon  the  pre- 
miums. 

This  is  due  to  the  theory,  a  very  practical  the- 
ory at  that,  that  the  loading,  in  order  to  meet  the 
requirements  of  the  agency  system,  must  be  pro- 
portionate to  the  net  premium,  or  nearly  so,  no 
matter  if  the  net  premium  has  been  increased  by 
a  large  pure  investment  addition.  Managers  of 
life  insurance  companies  who  would  roundly 
condemn  and  even  ridicule  a  pure  investment 
contract,  which  provided  for  deducting  20  per 
cent,  from  the  principal  for  expenses  and  at- 
tempting to  earn  full  returns  upon  the  whole  by 
putting  80  per  cent,  of  it  out  at  interest,  will  add 


230  BUSINESS  OF  LIFE  INSURANCE 

to  the  fair  premium  for  life  insurance,  including 
its  expense  provision,  a  pure  endowment  pre- 
mium to  mature  the  policy  in  a  fixed  number  of 
years  and  will  increase  that  extra  premium  paid 
for  investment  only  by  an  expense  charge  equal 
to  or  exceeding  25  per  cent. 

It  seems  reasonable,  upon  careful  examina- 
tion, to  load  a  life  insurance  premium  with  a 
sufficient  provision  for  expenses  to  enable  it  to 
be  sold  and  the  premiums  to  be  collected,  as  well 
as  for  expenses  of  management.  Life  insurance 
is  needed  by  thousands  who  would  never  avail 
themselves  of  it,  were  it  not  for  the  agents  who 
urge  its  sale.  It  is  as  justifiable  to  use  10  per 
cent,  or  15  per  cent,  of  the  premiums,  or  even 
more  if  there  are  weekly  collections,  to  defray 
the  cost  of  finding  patrons  for  life  insurance,  as 
to  add  to  the  real  cost  of  coal  the  expense  of  sell- 
ing and  delivering  it,  whether  by  the  ton  or  the 
basket.  That  is,  because  the  benefit  must  be 
paid  for.  The  price  may  be  high,  but  the  thing 
is  worth  it  and  cannot  be  furnished  for  less. 

An  investment  stands  upon  a  different  foot- 
ing. If  handicapped  in  this  manner,  it  ceases  to 
be  an  investment  at  all,  and  so  can  be  sold  only 
by  false  representations  of  its  real  character. 
For  that  can  hardly  be  called  an  investment 
which  returns  less  than  is  paid  or  which,  after 
years  elapse,  barely  returns  what  has  been  paid. 
Stated  in  this  bald  fashion,  such  a  proposal 


AS  AN  INVESTMENT  231 

would  not  be  attractive  to  anybody.  It  can  be 
marketed,  therefore,  only  by  pretending  that  in 
some  subtle  way,  not  easily  comprehended,  the 
deductions  from  the  principal  are  going  to  be 
made  good  out  of  the  earnings  and  a  round 
profit  be  realised  on  the  entire  payments. 

'When  such  contracts  are  offered  by  financial 
companies,  it  is  generally  understood  that  they 
are  not  reputable  concerns.  Banks  and  trust 
companies  of  good  standing  will  not  counte- 
nance the  practice.  The  so-called  ''bond  invest- 
ment" or  "bond  guaranty"  companies  are  rec- 
ognised to  be  engaged  in  piracy  instead  of  busi- 
ness. Calling  it  endowment  insurance  does  not 
alter  the  essential  nature  of  the  transaction. 

To  recapitulate,  a  life  insurance  policy,  at  the 
best,  can  be  compared  as  an  investment  with 
other  investments,  not  accompanied  with  life 
insurance,  only  when  a  proper  allowance  is  made 
for  the  cost  of  the  life  insurance. 

And,  even  on  that  basis,  it  cannot  appear  fav- 
ourably in  the  comparison  if  the  investment  pol- 
icy's premium  bears  a  larger  loading  for  ex- 
penses per  $1,000  insured  than  the  term  pre- 
mium of  the  company. 

Thus,  let  us  consider  some  actual  results  of 
policies  in  a  leading  company.  An  endowment 
insurance  maturing  in  fifteen  years,  with  a  divi- 
dend period  also  of  fifteen  years,  issued  at  age 
35  at  an  annual  premium  of  $65.99,  yielded  a 


232  BUSINESS  OF  LIFE  INSURANCE 

cash  result,  including  surplus,  of  $1,339.62.  This 
amounted  to  a  return  of  a  little  more  than  3|  per 
cent,  interest,  annually  compounded,  upon  the 
entire  premiums,  making  no  allowance  for  the 
value  of  the  life  insurance.  The  protection  the 
first  year  was  $1,000,  less  $47.02  reserve,  equals 
$952.98 ;  the  protection  the  last  year  was  $339.62, 
less  than  nothing,  i.  e.,  there  would  have  been  a 
loss  of  $1,339.62,  less  $1,000,  which  sum  only 
would  have  paid  at  death.  The  average  protec- 
tion, therefore,  has  been  only  $952.98  —  $339.62 
-^2  =  $613.36  ^  2  =  $306.68. 

This  is  approximate  only,  but  will  answer  to 
give  an  idea  of  the  benefits.  A  non-participating 
fifteen-year  term  insurance  for  $1,000  in  the 
same  company  would  have  cost  at  that  age 
$15.41  per  annum;  or,  let  us  say,  $4.72  for  an 
average  insurance  of  $306.68.  Deducting  this 
from  the  annual  premium  of  the  endowment  in- 
surance, $65.99,  we  have  net  an  average  annual 
investment  of  $61.27.  Upon  this  the  total  cash 
result  of  $1,339.62  returned  interest,  annually 
compounded,  at  nearly  4  per  cent,  per  annum. 

The  same  company  on  an  ordinary  life  policy 
for  $1,000,  with  fifteen-year  dividend  period,  re- 
turned $414.60  total  cash  result,  in  return  for 
premiums  of  $26.49  per  annum.  This  was 
scarcely  more  than  the  premiums  paid.  The  pro- 
tection the  first  year  may  be  taken  as  $1,000,  less 
$11.48  reserve,  equals  $988.52,  and  the  last  year 


AS  AN  INVESTMENT  233 

|1,D00,  less  $414.60,  equals  $585.40.  The  aver- 
age insurance  approximates  $988.52  -f  $585.20 
-2  =  $1,573.92  -^  2  =  $786.96.  On  the  basis  of 
the  same  term  rate,  this  was  worth  $12.13  per 
annum,  leaving  $14.36  of  the  premium  paid  in 
for  investment  purposes.  Upon  this  sum  an- 
nually invested  the  cash  return  of  $414.60 
yielded  interest  annually  compounded  at  nearly 
10  per  cent,  per  annum — a  large  part  of  which 
was  due,  of  course,  to  the  fact  that  the  insurance 
really  cost  less  than  the  term  rate. 

One  reason  for  the  difference  in  yield  is  that 
the  endowment  insurance  as  an  investment 
was  handicapped  with  a  loading  of  $12.27 
per  $1,000  to  only  $6.62  for  the  life  policy,  al- 
though the  average  protection  under  the  for- 
mer was  $306.68,  while  under  the  latter  it  was 
$786.96. 

Of  all  the  life  insurance  companies  doing  busi- 
ness in  the  United  States,  scarcely  a  half  dozen 
have  recognised  this  and  have  adjusted  their 
rates,  wholly  or  in  large  part,  conformably  with 
reason  and  common  sense. 

The  foregoing  illustrations  are  of  the  most 
favourable  results  of  such  policies ;  in  more  than 
a  few  instances  companies  have  treated  the  earn- 
ings of  these  policies  as  surplus  to  be  dealt  with 
as  the  company  desires  and  have  dissipated  it  in 
excessive  expenditure,  instead  of  accumulating 
it  for  the  policyholders.    In  such  case  the  pre- 


234  BUSINESS  OF  LIFE  INSURANCE 

tence  that  it  is  a  desirable  investment  is  tanta- 
mount to  a  fraud. 

Notwithstanding  which  facts,  a  considerable 
demand  has  been  created  for  life  insurance  poli- 
cies as  investments.  In  consequence  of  which  it 
behooves  the  companies  as  a  matter  of  fairness 
both  to  make  it  plain  that  at  the  best  the  invest- 
ment is  good,  only  in  case  the  value  of  the  pro- 
tection is  considered,  and  then  to  render  the 
handicap  as  little  as  possible  by  loading  endow- 
ment and  limited  payment  life  premiums  justly. 

This  means,  also,  that  one  of  the  chief  causes 
of  this  demand  must  be  eliminated,  viz.,  the 
stimulation  of  ''investment  insurance"  by  offer- 
ing higher  commissions  for  it.  Such  commis- 
sions can  be  given,  only  by  rendering  the  invest- 
ment by  so  much  less  advantageous.  In  the 
largest  and  most  representative  life  insurance 
company  in  the  British  empire  the  payment  of 
a  flat  commission  of  so  much  per  $1,000  of  insur- 
ance, regardless  of  plan  and  age,  has  resulted  in 
much  the  larger  part  of  the  business  being  whole 
life  policies,  a  fair  proportion  old  age  provi- 
sions by  means  of  long  term  endowment  insur- 
ances and  very  few  limited  payment  life  policies. 

The  vast  disproportion  of  limited  payment 
and  endowment  insurance  policies  in  American 
companies  is  due  to  peculiar  causes  that  have 
been  at  work  in  this  country.  First  of  all  should 
be  mentioned  the  great  disappointment  in  an- 


AS  AN  INVESTMENT  235 

nual  dividends  before  the  70 's.  Then  the  en- 
couragement of  the  view  that  there  would  be 
immense  gain  upon  tontine  policies  because  of 
the  lapses.  The  larger  commissions  that  were 
paid  upon  these  forms  also  helped,  as  did  the 
cheap  rates  for  investment  insurance,  which  de- 
ferred dividend  plans  rendered  possible,  as 
twenty-payment  life  or  even  whole  life  rates. 

But  the  crowning  cause  is  outside  of  life  in- 
surance. Our  great  country  wants  facilities  for 
caring  for  the  savings  of  the  people.  In  a  few 
eastern  States  we  have  excellent  mutual  savings 
banks.  In  the  most  of  the  States  stupidity  of 
legislators  and  people  and  cupidity  of  private 
interests  have  combined  to  prohibit  their  or- 
ganisation. Stock  savings  banks  have  been  pro- 
verbially of  the  ''pluck  me"  sort  and  also  fre- 
quently unsafe.  Trust  companies  have  bid  bet- 
ter rates  in  recent  years,  using  the  money  in 
speculations ;  that  they  will  do  so  well  in  times 
of  stress  is  unlikely.  In  any  event,  they  do  not 
reach  the  masses  of  the  people  in  outlying  towns 
and  villages.  Building  and  loan  associations 
have  aided  in  this  regard  in  some  localities,  but 
when  they  presented  a  probability  of  giving  re- 
lief in  a  large  way  through  branches,  schemers 
soon  found  this  a  promising  field  for  exploita- 
tion and  accordingly  ruined  it  both  for  them- 
selves and  others. 

Neither  have  our  people  learned  to  invest  sav- 


236  BUSINESS  OF  LIFE  INSURANCE 

ings  in  high-class  bonds,  as  have  the  frugal  peo- 
ple of  France,  for  instance.  Such  bonds  are  not 
issued  in  denominations  small  enough.  Bids 
are  not  invited  which  give  to  the  highest  bidder 
bonds  to  the  amount  of  his  bid,  but,  instead,  * '  all 
or  none'^  bids  by  underwriters  are  favoured. 
The  present  comptroller  of  New  York,  despising 
the  day  of  small  things  and  impatient  that  a  peo- 
ple could  not  learn  this  lesson  in  a  year  or  so, 
recently  got  legislative  authority  for  ''all  or 
none"  bids  and  small  bidders  are  now  disap- 
pearing there,  also,  which  marks  the  close,  per- 
haps, of  a  most  valuable  and  promising  attempt 
to  aid  our  people  to  appreciate  such  invest- 
ments. 

Under  these  conditions,  pure  protection, 
though  on  mistaken  plans,  having  passed  in 
large  degree  to  the  assessment  associations  and 
fraternal  societies,  investment  life  insurance 
has  grown  into  a  great  national  institution,  call- 
ing at  this  time  most  loudly  for  more  careful 
adjustment  of  loading  and  charges,  so  as  to  ful- 
i51  so  far  as  possible  all  reasonable  expectations, 
and  also  for  a  complete  clearing  away  of  the 
false  impression  that  it  is  a  good  investment, 
not  considering  the  protection  at  all. 


•CHAPTER  XXIV. 

THE  IDEAL.  P0LIC5Y 

The  primebenefit  of  a  policy  of  life  insurance 
is  the  insurance.  In  order  that  this  benefit  may 
be  as  valuable  as  possible,  it  is  necessary  that 
the  life  insurance  be : 

Safe. — This  calls  for  adequate  rates  and  the 
maintenance  of  reserves  from  the  premiums, 
sufficient  to  assure  the  payment  of  death-claims 
as  they  accrue. 

Certain. — Besides  safety,  this  requires  free- 
dom from  conditions  and  restrictions.  It  also 
requires  that  the  premium  shall  not  increase 
until  the  burden  is  unendurable,  as  it  would  upon 
a  plan  which  increases  the  premium  with  the  age 
as  the  cost  increases. 

For  the  whole  period  of  life. — It  is  true  that 
in  exceptional  cases  insurance  for  a  short  term 
is  desirable,  but  only  when  the  need  for  the  in- 
surance expires  with  the  term.  This  applies  to 
endowment  assurances,  as  well.  Much  the  larger 
number  of  the  holders  of  term  and  endowment 
policies  purchase  new  policies  at  the  expiration 

287 


238  BUSINESS  OF  LIFE  INSURANCE 

of  the  term  and  those  who  are  then  uninsurable 
are  bitterly  disappointed.  The  fact  that  under 
endowment  policies  they  have  accumulated  the 
sum  insured  does  not  deceive  all  of  them;  had 
they  carried  life  policies  and  invested  their  sav- 
ings elsewhere,  they  would  now  have  both  in- 
vestment and  insurance. 

Convenient  as  to  premium  payment. — This 
does  not  mean  convenienf  in  the  sense  of  small 
premiums  in  the  early  years,  involving  in  conse- 
quence very  large  premiums  in  later  years ;  but 
merely  that  the  form  and  amount  be  convenient. 
Undoubtedly,  level  premiums  are  more  conveni- 
ent, taking  into  account  the  whole  period  of  the 
insurance,  than  increasing  premiums,  and  when 
the  insured  has  provided  all  the  protection  he 
requires  and  can  afford  to  prepay  its  cost  in  one 
premium  or  in  five,  ten,  fifteen  or  twenty  annual 
premiums,  that  will  be  more  convenient  in  many 
cases. 

Liberal_as  to  terms. — An  illiberal  contract, 
holding  one  up  to  the  strict  letter  as  to  time  or 
mode  of  pajonent,  cannot  be  the  most  beneficial, 
for  there  are  many  exigencies  that  might  cause 
the  policy  to  be  forfeited  and  the  insurance  to 
be  lost.  The  ideal  policy,  therefore,  will  contain 
liberal  non-forfeiture  provisions,  sustaining  the 
policy  with  all  its  benefits  so  long  as  its  funds 
will  enable  this. 

Convertible. — To  secure  the  greatest  benefits 


THE   IDEAL   POLICY  239 

it  is  necessary  that  the  policy  be  freely  converti- 
ble into  cash,  into  paid-up  insurance  for  life  for 
a  fractional  amount,  or  for  a  limited  term  for 
the  full  amount,  or  into  other  forms  of  life  poli- 
cies, more  convenient  for  the  insured  under  his 
changed  conditions. 

Nejgotiable  as  security. — The  maintenance  of 
the  insurance  in  the  interest  of  the  beneJficiaries, 
their  very  support  at  the  present  time,  and  in- 
deed the  entire  fortune  and  prospects  of  the 
family  sometimes  depend  upon  the  ability  of  the 
policyholder  to  secure  a  loan  upon  his  policies. 
Especially  is  this  true  when  the  title  to  the  pol- 
icy is  in  the  beneficiary  and  the  insured  has  been 
ruined  financially  by  the  pressing  demands  of 
importunate  creditors. 

Exempt  from  claims  of  creditors. — The  fra- 
ternal beneficiary  laws  usually  exempt  policies 
in  those  societies  and  all  proceeds  thereof  from 
seizure  by  any  legal  or  equitable  process  for  the 
benefit  of  creditors  of  the  insured  or  the  bene- 
ficiary. This  may  appear  extreme,  but  when  it 
is  remembered  that  the  protection  is  bought  for 
others  at  the  sacrifice  of  one's  own  present  or 
future  enjoyment,  it  must  be  recognised  that  the 
money  is  impressed  with  a  most  sacred  trust. 
The  laws  applying  to  policies  in  the  regular  com- 
panies do  not  go  so  far,  but  they  usually  do  pro- 
tect the  policies  if  made  payable  to  a  wife  or 
child  against  the  creditors  of  the  insured. 


240  BUSINESS  OF  LIFE  INSURANCE 

Subject  to  right  to  change  the_  beneficiary. — 
Life  insurance  premiums  are  nearly  always  paid 
by  the  insured  and  not  by  the  beneficiary.  In 
order  that  the  former  may  be  able  to  make  the 
best  use  of  the  policy  paid  for  by  him  it  is  neces- 
sary that  he  be  able  to  change  the  beneficiary  at 
will.  Jt  is  also  fair  and  just.  This  is  recog- 
nised also  in  the  fraternal  beneficiary  laws, 
which  also  provide  for  this  right  to  change,  of 
course  without  incurring  a  loss  of  the  exemption 
from  demands  of  creditors.  The  status  as  to 
creditors,  of  policies  in  regular  companies,  con- 
taining this  privilege,  is  doubtful  and  calls  for 
legislation. 

With  clearly  stipulatedrights  asjtp  participa- 
tion.— The  evils  of  these  days  loudly  call  for 
strict  accounting  to  policyholders. 

With  frequent  accounting  for  surplus. — ^While 
there  may  be  every  reason  to  permit  surplus  to 
accumulate,  rather  than  to  withdraw  or  to  apply 
the  same,  the  proof  is  conclusive  that  it  is  to  the 
policyholder's  interest  that  his  portion  of  sur- 
plus be  frequently  ascertained  and  accounted  for. 

With  Uberalj)rijvileges  pLapplj^  — 

The  value  of  a  policy  is  much  enhanced  if  the 
surplus  may  be  withdrawn,  accumulated  or  ap- 
plied to  increase  the  insurance,  to  diminish  the 
number  or  the  amount  of  premiums  payable  in 
future,  or  to  mature  or  to  hasten  maturity  as  an 
endowment. 


THE   IDEAL   POLICY  241 

With  privilege_pf  pajment  of  proceeds.in.  in- 
stalments or  annuities. — The  obvious  purpose  of 
life  insurance  is  to  indemnify  for  loss  of  benefits 
that  were  accruing  or  would  accrue  by  the  in- 
sured's survival.  These  benefits  are  usually  of 
the  nature  of  financial  support  currently  pro- 
vided and  accompanied  by  care  or  oversight.  A 
lump  sum  very  imperfectly  indemnifies  even  the 
financial  loss  and  substitutes  for  the  care  the 
temptation  of  control  over  a  comparatively 
large  sum  which  might  easily  be  wasted  soon — 
and  often  is. 

With  a  fair  loading  of  the  premium  for  ex- 
penses.— Manifestly  the  ideal  policy  will  not  be 
one  in  which  the  loading  is  excessive  in  amount 
or  unfairly  distributed  between  the  first  and 
subsequent  premiums,  being  either  excessive  or 
insuflBcient  the  first  year. 

These  essential  requisites  may  be  recapitu- 
lated : 

Safe  rates  and  reserves. 

Freedom  from  restrictions. 

Protection  for  whole  of  life. 

Convenient  premium  payments. 

Liberal  terms  and  non-forfeiture. 

Surrender  and  loan  privileges. 

Exemption  from  claims  of  creditors. 

Privilege  of  changing  beneficiary. 

Clear  stipulation  for  participation. 

Frequent  accounting  for  surplus. 


242  BUSINESS  OF  LIFE  INSURANCE 

Liberal  privileges  to  apply  surplus. 

Instalment  and  annuity  options. 

With  a  just  loading  of  the  premiums,  both  as 
to  incidence  and  amount. 

If  the  company  is  mutual,  a  voice  in  the  con- 
trol of  the  company  is  also  to  be  desired. 

The  foregoing  essential  requisites  do  not,  how- 
ever, alone  qualify  a  life  insurance  policy  as 
ideal,  and  this  for_two  reasons : 

(1.  It  does  not  provide  for  the  partial  losses  of 
the  financial  value  of  a  life  which  arise  from 
temporary  physical  disability,  nor  the  loss,  more 
complete  than  death  itself,  because  of  perma- 
nent disability. 

(5.  It  does  not  provide  for  the  sustenance  of 
the  insured  in  old  age,  but,  instead,  continues 
the  insurance  in  force  long  after  the  financial 
value  of  the  life  has  disappeared. 

In  other  branches  of  insurance,  such  as  fire 
insurance,  a  partial  loss  or  damage  is  much 
more  frequent  than  a  total  loss,  and  no  person 
would  purchase  fire  insurance  which  would  not 
become  payable  for  a  part  at  least,  unless  the 
property  were  wholly  destroyed.  Much  less 
would  the  insurance  be  accepted,  were  it 
a  condition  that  the  insurance  should  not 
become  payable,  even  though  the  value  of  the 
property  was  wholly  destroyed,  unless  the 
actual  substance  were  consumed.  Instead,  a 
total  loss  may  occur,  although  the  material 


THE   IDEAL   POLICY  243 

is  not  destroyed,  if  it  has  been  rendered 
useless. 

On  the  contrary,  a  policy  of  life  insurance 
does  not  become  payable,  although  the  whole 
value  of  the  life  has  gone  out,  as  in  complete 
paralysis  or  incurable  insanity,  but,  instead, 
premiums  must  be  paid  and  the  sum  insured  is 
payable  only  when  the  death  actually  takes 
place.  Yet  the  financial  loss  by  the  permanent 
disability  is  actually  much  greater  than  would 
be  the  loss  by  the  death  of  the  insured,  for  not 
only  is  his  earning  power  destroyed,  but 
there  is  also  his  support  and  nursing  to  be 
provided. 

The  average  last  illness  has  been  variously 
estimated  at  from  one  year  to  more  than  two 
years.  In  any  event  often  there  is  a  long  period 
of  invalidity,  accompanied  by  great  hardships 
for  the  sufferer  and  his  family  and  not  infre- 
quently by  the  loss  of  the  life  insurance  through 
inability  to  keep  up  the  premiums. 

Both  for  the  purpose  of  providing  against  the 
financial  loss  through  this  permanent  disability 
and  also  for  the  purpose  of  rendering  it  more 
nearly  certain  that  the  life  insurance  can  be  kept 
up  until  death,  the  ideal  life  insurance  policy 
should  cover  the  loss  of  the  financial  value  of  a 
life  through  disability. 

Some  of  the  life  insurance  companies  furnish 
protection,  when  desired,  also  against  perma- 


244  BUSINESS  OF  LIFE  INSURANCE 

nent  disability  by  means  of  a  provision  that  part 
of  the  sum  insured  shall  be  paid  upon  proof  of 
such  disability.  Sometimes  this  is  only  upon 
surrender  of  the  policy,  in  which  case  the  fea- 
ture may  be  of  doubtful  benefit,  both  because 
death  is  probably  near  and  the  death  benefit  sur- 
rendered is  of  greater  value  than  half  the  sum 
in  hand,  and  also  because  it  may  even  happen 
that  this  disability  benefit  is  a  smaller  amount 
than  the  reserve  upon  the  life  policy.  It  is  also 
sometimes  provided  that  this  total  disability 
benefit  shall  be  a  charge  against  the  policy,  ac- 
cumulating at  interest  and  to  be  deducted  at 
death.  This  makes  it  amount  to  a  loan  which 
may  or  may  not  be  in  excess  of  the  reserve 
value. 

The  most  liberal  form  this  feature  has  so  far 
taken  is  that  of  paying  one-half  the  amount,  the 
insured  still  continuing  the  payment  of  pre- 
miums, and  the  company  being  bound  to  pay  the 
other  moiety  of  the  sum  insured  whenever  death 
occurs. 

Insurance  against  loss  of  time  through  tem- 
porary disability  either  by  sickness  or  accident, 
may  now  be  obtained  from  casualty  insurance 
companies.  By  a  very  recent  extension  of  the 
benefits,  disablement  by  any  sickness  whatever 
is  now  covered.  But  these  policies  are  subject 
to  the  following  serious  objections : 

They  are  renewable  only  at  the  pleasure  of  the 


THE    IDEAL   POLICY  245 

company,  which  means  that  if  the  insured  be- 
comes liable  to  frequent  disablement  through 
failure  of  health,  renewal  will  not  be  permitted. 

The  company  has  power  to  vary  the  premium 
rates  from  year  to  year. 

Indemnity  for  any  one  disability  is  limited  to 
a  fixed  term;  in  case  of  sickness  to  twenty-six 
weeks. 

The  premiums  contain  a  large  surcharge  for 
expenses,  the  same  commission  being  paid  to 
agents  each  year. 

Being  disconnected  from  life  insurance,  of 
which  this  form  of  insurance  is  essentially  a 
part,  the  premiums  are  low  enough  to  enable 
insurance  to  be  carried  beyond  the  actual  value 
of  a  man's  time,  without  undue  pressure  upon 
his  income.  This  moral  hazard  is  scarcely  pres- 
ent at  all  when  life  and  health  insurance  are  sold 
together. 

In  connection  with  a  life  insurance  policy,  it 
is  possible  to  furnish  at  a  much  lower  cost,  be- 
cause of  lower  expense  in  the  payment  of  com- 
missions, indemnity  for  the  whole  course  of  the 
disability,  renewable  without  increase  of  pre- 
mium and  at  the  option  of  the  insured.  Abun- 
dant statistics  upon  which  to  base  these  rates 
are  now  obtainable. 

Life  insurance  policies  embracing  these  fea- 
tures, in  addition  to  those  already  referred  to, 
would  cover  about  as  follows : 


246  BUSINESS  OF  LIFE  INSURANCE 

Life  insurance — 
$10,000. 

Disability  insurance — 

Fifty  dollars  per  week,  first  quarter  year  of 
any  disability.  Thirty  dollars  per  week,  second 
quarter  year.  Twenty  dollars  per  week  there- 
after to  age  70. 

Old  age  provision — 

No  premium  beyond  age  70  (or  paid-up  by 
one,  five,  ten,  fifteen  or  twenty  annual  pre- 
miums). 

After  age  70  an  annuity  of  $20  per  week  for 
the  life  of  the  insured  and  continuing,  in  event 
of  his  death  within  ten  years,  until  it  has  been 
paid  for  that  full  period. 

There  is  often  a  marked  preference  for  age 
65  or  even  age  60  for  the  annuity  to  begin.  But 
the  cost  is  very  much  more,  and  the  disability 
insurance  under  the  contract  described  fur- 
nishes a  like  income  if  the  insured  actually  be- 
comes disabled  before  attaining  age  70. 

The  policy  which  fulfils  all  these  require- 
ments may  well  displace  both  the  fallacious  cur- 
rent cost  plans  of  fraternal  societies  that  have 
not  readjusted  their  rates  on  a  sound  basis,  and 
the  tnunpery,  so-called  ''investment"  plans  by 
which  some  of  the  regular  companies  mislead 
men.  Both  of  these  classes  of  institutions  cause 
the  value  of  insurance  itself  to  be  grossly  under- 


THE   IDEAL   POLICY  247 

estimated,  whereas,  in  point  of  fact,  the  policy 
which  surrounds  a  man  and  his  family  with  the 
most  perfect  protection  is  the  ideal  life  insur- 
ance policy. 


CHAPTER   XXV 

IMPAIRED,  SUB-STANDARD  OR  UNDER-AVERAGE  LIVES 

In  the  early  years  of  life  insurance  lives  were 
accepted  without  medical  examination.  The  ap- 
plicant made  certain  warranties  concerning  his 
physical  condition,  and  also  usually  presented 
himself  before  the  board  for  inspection.  If  he 
seemed  healthy  he  was  accepted. 

The  rate  being  redundant,  fortunately  this 
course  did  not  result  in  a  catastrophe.  But  grad- 
ually more  and  more  precautions  were  taken, 
and  a  medical  inspection  was  soon  called  for. 
This  first  took  the  form  of  a  confidential  report 
from  the  applicant's  own  medical  adviser,  but 
as  it  was  discovered  that  he  called  for  a  fee  for 
the  service  the  companies  began  to  employ  phy- 
sicians of  their  own  choosing,  which  cost  no  more 
and  was  more  satisfactory. 

This  resulted  in  many  applicants  being  re- 
jected, the  percentage  varying  from  about  10 
per  cent,  to  as  high  as  30  per  cent.,  depending 
upon  the  strictness  of  the  company  and  its  will- 
ingness, or  the  contrary,  to  make  special  rates 

248 


IMPAIEED   LIVES  249 

for  such  as  did  not  come  up  to  the  select  stand- 
ard. This  was  a  most  serious  matter,  for  all  of 
the  rejected  applicants  were  persons  who  were 
convinced  that  they  needed  life  insurance,  and 
to  be  denied  it  was  in  many  cases  a  positive  de- 
privation, robbing  a  man's  declining  years  of 
that  assurance  of  the  support  of  his  dependents 
in  event  of  his  death,  which  alone  can  make  the 
approach  of  the  fell  destroyer  supportable. 

The  race  of  our  American  companies  involved 
a  close  competition  as  to  results  to  policyholders 
for  many  years.  In  consequence  they  endeav- 
oured to  be  strict  in  the  selection  of  risks  in 
order  to  increase  the  returns  to  policyholders. 
As  the  severity  of  the  warranty  provisions  was 
relaxed,  the  subjects  of  inquiry  and  investiga- 
tion by  the  medical  examiners  were  multiplied, 
until  at  this  time  the  examination  and  inquiry 
blank  used  by  American  companies  is  much  the 
most  formidable  docmnent  of  the  sort  to  be 
found  in  any  country. 

It  became,  also,  a  fixed  rule  not  to  make  the 
company  a  "graveyard"  by  accepting  under- 
average  lives  on  any  basis,  and  for  years  it  was 
a  reproach,  not  relished  by  an  American  com- 
pany, that  it  accepted  lives  which  other  com- 
panies had  rejected.  This  condition  grew  in 
part  out  of  the  autonomy  of  the  companies.  It 
has  already  been  remarked  that,  unlike  the  com- 
panies of  other  countries,  the  American  com- 


250  BUSINESS  OF  LIFE  INSURANCE 

pany  is  not  managed  by  its  actuary,  who  is,  in- 
stead, only  a  mathematical  fmictionary  usually, 
with  prescribed  duties.  In  consequence,  the 
various  functions  were  specialised,  much  more 
thoroughly  previously  than  now,  and  to  the  med- 
ical director  was  given  the  sole  determination 
as  to  the  acceptance  or  rejection  of  an  applica- 
tion. It  was  very  easy  for  him  to  determine 
whether  a  life  came  up  to  a  prescribed  standard 
and  so  to  accept  or  reject.  But  he  was  not  sup- 
plied with  alternative  standards  in  many  cases, 
and  had  the  actuary  endeavoured  to  supply  them 
it  would  have  been  resented  as  an  impertinent 
interference.  Actuaries  were,  however,  compla- 
cently satisfied  with  their  own  position  and 
work. 

One  result  of  this  authority  of  the  medical  de- 
partment was  that  the  medical  director  was  con- 
stantly influenced  to  exercise  it  strictly  by  cer- 
tain rules,  and  also  in  every  case,  or  nearly  so, 
to  reject  if  some  other  company  had  done  so 
already.  The  reason  for  this  is  not  far  to  seek. 
If  he  accepted  the  life,  and  death  ensued  in  a 
short  time,  especially  from  the  cause  indicated 
in  the  papers,  when  the  claim  came  before  the 
committee  for  approval,  the  medical  department 
came  in  for  criticism.  Neither  the  medical  direc- 
tor nor  the  committee  understood  the  law  of 
average  well  and  these  criticisms  were  natural, 
therefore,  and  were  felt  to  be  deserved. 


IMPAIEED  LIVES  251 

The  only  mode  which  our  medical  depart- 
ments favoured  for  taking  care  of  risks  that 
were  not  found  first-class,  was  by  means  of  en- 
dowment policies,  though  sometimes  an  extra 
premium  was  asked,  as  to  cover  special  occupa- 
tion hazard.  This  mode  was  defended  on  the 
following  grounds : 

1st.  The  mortality  under  endowment  policies 
is  lower,  owing  to  the  self-selection  by  appli- 
cants, only  good  risks  applying  as  a  rule  for 
such  policies. 

2d.  The  premium  is  high  and  the  company 
has  received  more,  if  death  does  occur. 

3d.  The  actual  insurance  or  amount  at  risk 
diminishes  rapidly,  owing  to  the  larger  reserves. 

4th.  The  policy  expires  after  a  definite  term 
of  years,  so  that  the  risk  may  be  accepted  on  this 
plan  if  the  medical  director  thinks  the  life* 'good 
for  so  many  years. ' ' 

Every  one  of  these  is  a  fallacy  as  applied  to 
this  problem,  which  actuaries  could  easily  have 
shown.  It  is  true  that  among  persons  who  apply 
for  endowment  policies,  there  is  favourable  self- 
selection,  but  among  persons  found  impaired 
and  forced  to  accept  them  or  nothing,  precisely 
the  opposite  obtains.  Only  those  of  them  who 
have  grave  fears  as  to  their  condition  are  will- 
ing to  pay  these  high  rates  usually.  By  appli- 
cants for  endowment  insurance  policies,  the  high 
premium  is  paid  for  the  endowment  benefit  and 


252  BUSINESS  OF  LIFE  INSURANCE 

not  for  life  insurance,  i.  e.,  to  provide  for  sur- 
vivors and  not  to  pay  death  claims,  but  this  is 
not  always  nor  even  usually  the  point  of  view  of 
men  who  are  forced  to  take  the  high-rate  plan. 
Under  the  unfair  conditions  which  prevail  here, 
as  to  loading  of  endowment  premiums,  there  is, 
however,  what  amounts  to  an  extra  premium, 
but  this  was  really  applied  to  the  payment  of 
expenses  instead  of  to  cover  the  extra  hazard. 
It  is  true  that  the  actual  amount  at  risk,  above 
the  policy's  reserve,  more  rapidly  diminishes; 
but  the  mortality  provision  in  the  premium 
diminishes  accordingly,  and  all  that  is  gained  by 
that  is  that  if  the  actual  insurance  is  carried  at 
a  loss,  not  so  much  is  lost  because  not  so  much 
actual  insurance  is  carried.  That  is  not,  how- 
ever, what  was  contemplated.  If  the  mortality 
provision  were  ample,  so  that  a  profit  appeared, 
there  would  be  every  reason  to  desire  that  as 
much  as  possible  actual  insurance  be  carried, 
yielding  as  much  profit  as  possible.  And,  also, 
in  that  event  there  could  be  no  occasion  for  de- 
siring the  policy  to  expire  after  a  given  number 
of  years. 

This  system  entailed  the  greatest  hardships 
upon  applicants  who  did  not  come  up  to  the 
standard,  with  a  minimum  of  advantage  to  the 
companies  which  also  refused  even  such  policies 
to  sub-standard  lives.  As  an  instance  of  this 
hardship,  consider  a  life  at  30  applying  for  ordi- 


IMPAIRED   LIVES  253 

nary  life  insurance,  witli  a  premium  of,  say, 
$116.50  for  $5,000,  and  offered  instead  $1,000  on 
the  ten-year  endowment  plan,  with  a  premium 
of  $106.  In  need  of  all  the  protection  his  money 
will  command  and  willing  to  pay  whatever  the 
risk  of  his  death  calls  for,  he  is  compelled  to  pay 
about  $85  per  annum,  say,  for  investment  pur- 
poses, and  to  reduce  the  amount  of  protection  to 
a  pittance,  without  the  company  really  getting  a 
cent  more  for  the  protection  it  furnishes,  per- 
haps, except  in  loading,  which  is,  in  fact,  wholly 
taken  up  in  paying  expenses.  An  enormously 
greater  margin  would  be  had  if  $3,000  or  even 
$4,000  ordinary  life  insurance  were  offered,  in- 
stead of  $5,000,  for  the  same  premium. 

Companies  of  other  countries  for  the  most 
part  pursue  a  different  course,  having  been 
guided  by  their  actuaries.  They  have  accepted 
all  the  lives  offered  which  they  thought  could  be 
rated,  so  as  to  cover  the  risk  and  yield  a  profit. 
This  rating  has  been  mainly  by  means  of  one  of 
the  following  methods : 

1st.  Extra  premiums. 

2d.  The  regular  premiums,  but  at  a  higher 
age. 

3d.  Charging  a  lien  against  the  policy  to 
be  deducted  at  death,  usually  diminishing  in 
amount  as  further  premiums  are  paid. 

The  first-named  method  was  the  first  thought 
of,  also,  or  at  least  the  first  to  be  put  in  practice. 


254  BUSINESS  OF  LIFE  INSURANCE 

As  applied  to  term  policies,  it  gives  a  diminish- 
ing extra  rating,  taken  as  a  percentage  of  the 
provision  for  normal  mortality.  As  applied  to 
life  policies,  it  gives  an  increasing  provision  in 
some  cases  and  a  diminishing  one  in  others ;  to 
limited  payment  policies  always  an  increasing 
provision,  and  to  endowment  policies  always  a 
rapidly  increasing  provision.  The  last  mention- 
ed has  been  a  favourite  mode,  when  the  risk  has 
been  considered  particularly  bad  and  likely  to 
retrograde  rapidly. 

Otherwise,  the  method  of  assessing  an  extra 
premium  has  been  found  useful  mainly  when  the 
cause  of  the  extra  hazard  is  temporary  and 
is  fixed  in  amount  or  nearly  so ;  as,  for  instance, 
to  cover  hazards  of  occupation,  residence  or 
travel.  Occasionally  also  it  is  employed  when 
there  is  an  ailment  which  is  likely  to  pass  away, 
but  this  is  not  so  defensible  since  insurance  deals 
with  averages,  and  if  the  individual  cases  which 
improve  are  given  a  reduced  rate,  the  extra  rate 
imposed  must  have  been  enough  to  cover  the 
payment  for  such  only  of  the  lives  as  have  not 
improved. 

The  method  of  rating  up  to  the  regular  pre- 
mium at  a  higher  age  has  long  been  favoured  by 
actuaries  employed  by  most  companies  of  other 
countries.  It  is  based  upon  the  hypothesis, 
which  is  not  quite  true,  that  every  impairment 
of  physical  condition  may  be  taken  as  incurring 


IMPAIRED   LIVES  255 

a  risk  of  death  corresponding  to  that  of  the 
average  person  of  an  advanced  year  of  age. 
This  is  not  accurately  realised  in  practice,  both 
because  there  are  impairments  which  if  not  fatal 
soon,  tend  to  improve,  and  also  because  the  aver- 
age result  of  impairments  cannot  as  yet  be  fore- 
told correctly.  Yet  it  is  so  nearly  reliable  that  in 
a  very  large  company  which  applied  it  to  about 
one-third  of  the  lives  accepted,  the  mortality 
upon  these  lives  was  about  67  per  cent,  of  the 
expected  deaths  by  the  mortality  table  at  the 
rated-up  ages,  while  the  average  mortality  for 
the  entire  company  was  about  65  per  cent.  The 
estimation  of  the  degree  of  impairment  was, 
therefore,  very  close. 

This  method  has  the  very  distinct  advantages 
that  it  provides  not  only  for  augmented  risk  now, 
but  also  for  an  increasing  liability  to  die  beyond 
the  normal  increase  from  the  actual  age.  In 
consequence,  there  is  neither  justification  nor 
excuse  for  refusing  to  issue  to  these  persons  life 
or  limited  payment  policies,  and  a  very  moder- 
ate increase  in  the  rate  means  a  very  considera- 
ble extra  provision,  increasing  sharply  with  ad- 
vancing age.  For  instance,  when  a  man  now 
aged  forty  is  rated  as  fifty,  the  immediate  in- 
crease in  mortality  provision  for  the  actual  in- 
surance is  only  from  $9.79  per  $1,000  by  the 
American  Experience  Table  to  $13.78;  but  ten 
years  later  it  is  from  $13.78  to  $26.69—4.  e.,  the 


256  BUSINESS  OF  LIFE  INSUEANCE 

cost  at  sixty  instead  of  fifty — and  twenty  years 
after  issue  from  $26.69  to  $61.99,  the  cost  at  sev- 
enty instead  of  at  sixty. 

The  addition  to  the  age  is  usually  from  three 
to  seven  years,  occasionally  as  much  as  ten  years 
when  the  life  is  young.  Although  some  com- 
panies have  experimented  with  rating  up  twenty 
years  or  more  young  lives  which  are  badly  im- 
paired, it  is  usual  to  decline  if  more  than  seven 
or  ten  years  at  most  appears  to  be  called  for. 

One  advantage  of  the  use  of  this  system  is 
that  many  lives  which  in  its  absence  would  be 
dealt  with  as  select,  though  very  near  the  line, 
would  receive  a  small  rating.  Thus  a  company 
which  accepts  by  virtue  of  rating  up  all  but 
10  per  cent,  of  the  applicants,  rating  up  20  per 
cent,  of  them  and  accepting  70  per  cent,  as  select, 
would  probably  have  taken  80  per  cent.,  say,  as 
select  in  the  absence  of  this  contrivance — that 
is,  of  the  20  per  cent,  rated  up,  perhaps  one-half 
would  have  been  rejected  and  the  other  half 
have  been  accepted  select.  If  the  rating  up  has 
been  well  done,  the  company  gains  therefore  not 
merely  by  being  enabled  to  accept  10  per  cent, 
more  of  the  lives  offered,  at  profitable  rates,  but 
also  by  having  put  a  profitable  rating  upon  an- 
other 10  per  cent,  of  the  lives,  which  would  have 
been  accepted  otherwise  with  dubious  chances 
for  profit. 

That  this  is  not  theory  only  is  shown  by  the 


IMPAIRED   LIVES  257 

fact  that  the  large  company  referred  to  has 
rated  up  one-third  of  the  lives  accepted  by  it. 
Its  rejections  would  not  have  been  more  than  10 
per  cent,  of  the  total  number  of  lives  now  ac- 
cepted, perhaps,  and  probably  less,  showing  that 
a  considerable  gain  is  made  from  the  rating  up 
of  lives  that  would  otherwise  have  been  accepted 
as  select.  This  is  also  confirmed  by  the  circum- 
stance that  an  exhaustive  study  undertaken 
some  years  ago  by  the  actuaries  of  a  prominent 
American  company  disclosed  that  a  large  pro- 
portion of  the  lives  that  would  on  this  basis  be 
rated  up  were  being  accepted  as  select. 

Eated-up  policies  are  issued  either  with  the 
surrender  values  for  the  actual  age  or  for  the 
rated-up  age.  The  former  are  usually  the 
smaller,  and  since  in  every  other  respect  the  life 
is  dealt  with  as  of  the  rated-up  age,  it  is  appar- 
ently unfair  to  treat  it  otherwise  in  this  regard. 
It  is  also  equivalent,  especially  if  reserves  are 
held  as  for  the  actual  age,  to  collecting  an  extra 
premium  of  the  difference  between  the  pre- 
miums for  the  rated-up  age  and  the  actual  age. 
The  insured  does  not  receive  the  additional  ben- 
efits in  dividends  and  values  that  accompany  the 
plan  of  rating  up,  and  the  company  does  not 
hold  the  reserve  for  the  augmented  risk  in  after 
years  which  the  plan  calls  for. 

Giving  the  lower  surrender  values,  even  when 
the  higher  reserves  are  held,  is  defended,  how- 


258  BUSINESS  OF  LIFE  INSURANCE 

ever,  on  the  ground  that  if  the  impairment 
passes  away  and  the  life  becomes  select  before 
the  rated-up  age  is  attained,  or  soon  afterward, 
it  would  otherwise  pay  the  insured  to  surrender 
the  policy  and  to  insure  elsewhere,  and  thus  oc- 
casion selection  against  the  company. 

The  answer  to  this  is  that  the  rate  was  fixed 
upon  the  basis,  not  of  an  average  expectation, 
some  lives  improving  and  others  retrograding, 
but  on  the  basis  that  all  average  to  retrograde 
precisely  as  do  lives  that  start  out  in  average 
health  from  the  rated-up  age.  Now  of  men  who 
actually  do  set  out  from  age  50,  for  instance,  it 
is  not  true  that  some  are,  after  some  years,  safe- 
ly insurable  at  the  rates  for  50  or  even  younger ; 
and,  if  it  takes  place  in  regard  to  a  rated-up  life, 
the  phenomenon  should  not  be  treated  as  a  thing 
provided  for  in  the  rating,  but,  instead,  as  call- 
ing for  readjustment.  In  other  words,  the  com- 
pany itself  should  be  ready  both  to  give  the  rate 
for  the  actual  age  at  entry  and  to  rebate  the  ex- 
cess on  the  reserve  over  what  is  required.  This 
programme  would  effectually  avoid  the  ''twist- 
ing" into  other  companies  in  such  cases,  which 
also  cannot  be  forestalled  by  illiberal  surrender 
values. 

Of  recent  years  the  course  of  American  com- 
panies in  the  matter  of  impaired  lives  has  been 
materially  modified.  Several  companies  now  ac- 
cept such  lives  freely,  but  chiefly  on  a  plan  which 


IMPAIRED   LIVES  259 

charges  against  the  policy  a  lien  to  be  deducted 
in  event  of  the  death  of  the  insured,  the  lien 
diminishing  each  year,  usually  by  the  amount  of 
the  premium  paid,  until  extinguished. 

It  is  claimed  for  this  method  that  it  provides 
for  an  improvement  in  such  of  the  lives  as  sur- 
vive, they  proving  by  this  survival  that  they  are 
as  good  as  average  lives,  and  when  only  the 
ordinary  reserves  for  a  policy  for  the  face 
amount  issued  at  the  actual  age  are  held,  it 
would  be  equivalent  to  charging  a  diminishing 
extra  premium  for  an  improving  extra  hazard. 
But  this  view  can  hardly  be  maintained  as  to 
most  of  the  lives  accepted,  and,  of  course,  mere 
survival  proves  too  much  or  nothing,  since,  even 
though  rated  up,  many  lives  would  be  expected 
to  survive  ten,  fifteen  or  twenty  years. 

The  fact  is  that  the  system  was  adopted  be- 
cause, first,  something  like  it  had  twice  been 
tried  in  the  United  States,  and,  second,  it  seemed 
to  be  most  suitable  for  our  agency  system  for 
the  reason  that  it  does  not  exact  a  higher  pre- 
mium, and,  therefore,  can  often  be  delivered 
where  a  policy  with  a  larger  premium  might  not 
be.  Men  often  have  great  confidence  in  their 
survival,  also. 

It  is  to  be  feared  that  it  is  on  this  very  ac- 
count subject  to  grave  abuses.  The  agent  may 
withhold  information  about  the  lien.  But 
by  plainly  setting  forth  the  net  sum  payable 


260  BUSINESS  OF  LIFE  INSURANCE 

in   event   of   death,   the   company    can    avoid 
this. 

These  liens  often  seem  excessive,  but  that  they 
ever  are  is  by  no  means  sure.  They  undoubtedly 
do  diminish  the  desirability  of  the  protection 
and  many  would  prefer  to  pay  the  proper  pre- 
mium and  enjoy  the  full  protection.  Very  large 
liens  would  be  required  if  they  were  made  equiv- 
alent even  to  a  moderate  addition  to  the  age. 
Computations  made  by  a  leading  London  actu- 
ary show  that  the  usual  liens — such  as  from  30 
per  cent,  to  50  per  cent.,  or  equal  to  the  single 
premium  for  the  same  plan  of  insurance — are 
very  moderate  indeed. 


CHAPTER  XXVI 

FROM   APPLICATION   TO   PAYMENT  OF   CLAIM 

The  instrumeiit  by  means  of  which  one  makes 
known  his  desire  to  obtain  a  policy  of  life  insur- 
ance is  in  this  country  called  an  application,  in 
Great  Britain  a  proposal.  These  two  names 
indicate  the  change  of  attitude  as  to  the  nature 
of  a  life  insurance  contract  which  has  taken 
place,  and  also  as  to  who  are  the  parties  to  the 
contract.  When  it  was  considered  that  a  policy 
was  a  contract  between  the  company  and  the 
beneficiary,  and  that  the  insured's  life  was  mere- 
ly the  subject  of  the  contract,  naturally  this  in- 
strument was  deemed  a  proposal,  for  it  meant 
in  theory,  and  sometimes  in  fact,  that  the  bene- 
ficiary proposed  the  life  for  insurance  for  her 
benefit.  Later,  when,  as  almost  from  the  begin- 
ning in  the  United  States,  these  contracts  came 
to  be  considered  to  be  made  with  the  insured  as 
a  party  instead  of  with  the  beneficiary,  and  when 
almost  all  of  them  are  paid  for  and  maintained 
in  force  by  the  insured,  it  was  but  natural  that 
the  same  instrument  should  be  deemed  an  appli- 

261 


262  BUSINESS  OF  LIFE  INSURANCE 

cation,  although  for  many  years,  even  in  this 
country,  owing  to  the  conservatism  of  the  courts 
and  their  disposition,  perhaps,  to  stick  to  fixed 
forms,  the  application  was  signed  as  has  already 
been  said,  both  by  the  insured  and  the  benefici- 
ary. 

Originally  the  proposal  or  application  blank 
was  a  very  simple  one.  Even  after  it  became 
customary  to  require  the  insured  to  make  cer- 
tain warranties  as  to  his  condition  of  health, 
past  history,  last  illness,  family  history,  etc., 
and  also  as  to  occupation,  residence,  travel,  etc., 
the  document  was,  notwithstanding,  exceeding- 
ly brief  and  simple. 

But  with  the  increased  care  in  the  selection  of 
risks,  further  information  was  required  by  the 
companies,  and  especially  with  the  introduction 
of  inquiries  from  the  medical  referee  or  ex- 
amination by  the  companies'  physicians,  the 
blank  continued  to  grow  until  it  was  very  for- 
midable indeed. 

In  the  United  States,  owing  to  our  disposition 
to  refuse  all  but  select  lives,  it  became  much 
more  complicated,  and  the  inquiries  much  more 
extensive  than  in  Great  Britain  and  in  most 
other  countries.  In  the  earlier  days  when  the 
physician  was  paid  a  small  fee,  usually  not  more 
than  $2.00  or  $3.00,  for  the  examination,  and  per- 
haps also  as  a  relic  of  the  custom  of  yet  earlier 
tixueS;  companies  permitted  their  agents  and 


APPLICATION  TO  DEATH-CLAIM  263 

other  representatives  to  write  in  the  replies  for 
the  applicant.  In  theory,  in  those  days,  the  ap- 
plication was  filled  out  by  the  applicant  himself; 
in  practice  nearly  always  by  the  agent,  the  ap- 
plication blank  containing  a  provision  that  for 
this  purpose  he  should  be  deemed  the  agent  of 
the  applicant  and  not  of  the  company.  The  por- 
tion of  the  application  to  be  filled  out  by  the 
agent  at  that  time  embraced  most  of  the  usual 
questions  as  to  personal  condition  and  personal 
and  family  history. 

Nowadays,  precisely  the  contrary  is  the  case. 
The  application  is  usually  a  very  simple  docu- 
ment, and  contains  only  the  necessary  questions 
to  determine  the  amount  and  kind  of  insurance 
to  be  taken,  the  premium  to  be  paid,  etc.  The 
other  statements  are  on  a  separate  blank,  and 
are  filled  in  by  the  physician,  instead  of  by  the 
agent.  Notwithstanding  which,  this  is  a  part  of 
the  application,  and  the  statements  are  usually 
warranties. 

In  addition  to  making  these  statements,  which 
are  witnessed  by  the  signature  of  the  applicant, 
he  must  submit  himself  to  an  examination  by  the 
physician,  who,  on  the  other  side  of  the  blank, 
states,  for  the  information  of  the  company,  what 
he  has  found  and  witnesses  this  by  his  own  sig- 
nature. The  examination  inquiries  embrace  all 
those  matters  which  the  physician  can  find  out 
for  himself,  while  tjj^  portion  signed  by  the  ap- 


264  BUSINESS  OF  LIFE  INSUEANCE 

plicant  covers  all  those  inquiries  which  he  alone 
can  answer. 

Formerly  it  was  the  custom  of  companies  to 
permit  the  application,  when  the  examination 
was  completed,  to  be  turned  over,  with  all  the 
papers  relating  to  it,  to  the  agent.  Most  com- 
panies have  now  discontinued  this  practice,  and 
require  that  the  medical  examiner  shall  forward 
them  directly  to  the  home  office.  Some  compa- 
nies, however,  continue  the  other  practice;  but 
these  usually  instruct  the  examiners  to  forward 
private  advices  as  to  their  recommendations  di- 
rectly to  the  home  office.  The  purpose  of  this  is 
not  merely  to  avoid  the  possibility  of  being  im- 
posed upon  by  forgeries,  but  also  for  the  pur- 
pose of  guarding  against  the  medical  examiner 
being  over-persuaded  into  changing  his  recom- 
mendations without  giving  the  company  the 
benefit  of  his  previous  discoveries  and  conclu- 
sions. There  is  no  objection,  of  course,  to  an 
examiner  changing  his  recommendations,  but 
there  is  objection  to  his  failing  to  advise  the 
company  of  everything  which  he  has  discovered. 

As  a  part  of  the  examination  by  the  physician 
a  test  of  the  urine  is  nowadays  almost  always  re- 
quired. This  test  is  usually  by  separation 
through  a  centrifugal  process,  by  boiling,  by 
chemical  analysis  and  combination,  and  by  mi- 
croscopic examination.  The  last  mentioned  is 
not  so  frequently  employed.    In  earlier  days  the 


APPLICATION  TO  DEATH-CLAIM  265 

companies  accepted  risks,  wholly  without  this 
examination,  and  even  until  a  recent  date  they 
required  this  test  only  when  the  amount  was 
large.  A  microscopic  examination  of  the  blood 
is  sometimes  called  for  also. 

In  earlier  days  likewise  the  applicant  was  re- 
quired to  pay  the  fee  of  the  examiner,  which 
was,  perhaps  partly  on  that  account,  kept  at  a 
very  moderate  figure.  In  later  years  the  com- 
panies have  paid  this  fee,  and  in  most  cases  it 
is  now  considerably  larger,  partly,  in  all  proba- 
bility, because  the  company  is  paying  it.  It  is 
one  matter  for  a  physician  to  collect  his  fee  from 
an  individual,  and  an  altogether  different  mat- 
ter to  collect  it  from  a  company,  and  while  the 
mere  fact  that  he  has  a  larger  patronage  from 
the  company  might  seem  to  call  for  a  lower  rate 
of  compensation,  this  is  not  usually  the  way  it 
turns  out.  There  have  been  exceptions  to  this 
rule,  however, which  have  taken  two  forms :  first, 
the  fixing  of  a  lower  fee  on  condition  that  a  cer- 
tain number  of  examinations  should  be  made,  so 
that  the  aggregate  income  would  be  a  sufficient 
sum ;  and  the  paying  of  a  salary  instead  of  fees. 
The  former  has  been  employed  by  industrial 
companies  chiefly,  the  latter  by  several  of  the 
most  important  companies  transacting  an  ordi- 
nary business. 

In  connection  with  the  operations  of  the  great 
Australian  company,  an  experiment  of  the  most 


266  BUSINESS  OF  LIFE  INSURANCE 

valuable  character  has  been  made  in  this  mat- 
ter, viz.,  employing  a  physician  on  a  salary  to 
accompany  each  active  agent,  on  a  basis  that  he 
should  actually  represent  the  company,  aid  to 
cause  the  proper  rate  to  be  put  upon  the  life, 
and,  in  fact,  combine  the  duties  of  medical  ex- 
aminer and  medical  director,  subject,  however, 
to  correction  of  his  judgment  by  the  home  office. 
In  former  days  it  was  customary  for  the  pay- 
ment of  the  first  premium  to  be  withheld  until 
it  was  known  that  the  life  was  accepted.  This 
is  still  the  custom  in  Great  Britain,  though  even 
there  the  premium  is  nowadays  paid  usually 
when  notice  is  sent  that  the  life  has  been  ac- 
cepted, and  the  policy  is  issued  some  time  after- 
ward. In  this  country,  on  the  other  hand,  a  cus- 
tom has  grown  up  of  giving  a  binding  receipt 
and  collecting  the  premium,  or  making  a  settle- 
ment in  regard  to  its  payment,  when  the  applica- 
tion is  taken,  or,  in  any  event,  before  the  papers 
are  sent  on  to  the  home  office.  Of  course,  this  is 
not  the  invariable  custom,  but  it  is  usual,  and  the 
receipt  which  is  given  the  insured  binds  the  com- 
pany to  pay  the  claim  if  the  risk  has  in  fact  been 
approved  and  death  takes  place  before  the  pol- 
icy is  issued  and  delivered,  and  to  deliver  the 
policy,  no  matter  what  the  insured's  condition 
of  health  at  the  time  of  delivery.  There  is  usual- 
ly a  blank  in  the  application,  showing  whether 
the  premium  has  been  paid  in  advance  or  not. 


APPLICATION  TO  DEATH-CLAIM  267 

If  it  is  not  so  paid  a  condition  of  the  policy  is 
that  it  shall  not  be  in  force  until  it  has  been  de- 
livered and  the  premium  has  actually  been  paid. 
It  is,  therefore,  always  wise  to  pay  a  premium 
in  advance  and  take  a  binding  receipt,  not  only 
because  in  event  of  death  before  the  delivery  of 
the  policy,  but  after  the  approval  of  the  life,  the 
insurance  will  be  in  force;  but  also  because 
agents  are  instructed  otherwise  not  to  deliver 
the  policy  and  collect  the  premium  in  event  the 
insured  is  not  then  living  and  in  good  health.  It 
is  also  a  condition  of  the  policy  that  it  shall  not 
go  into  force  unless  the  premium  is  paid  during 
the  lifetime  and  good  health  of  the  insured. 

At  the  home  office  the  application  and  exami- 
nation are  referred  to  the  medical  department. 
The  medical  director  or  one  of  his  assistants 
examines  the  same  carefully,  noting  any  defects 
which  may  appear  in  the  present  condition  of 
health,  personal  history  or  family  history.  If 
the  life  is  strictly  first-class,  his  labours  are  com- 
pleted when  he  has  so  certified,  and  the  policy 
issues  as  a  matter  of  course  on  the  plan  and  for 
the  amount  applied  for,  provided  that  the  re- 
sult of  an  inspection  of  the  life,  which  is  nowa- 
days nearly  always  required,  proves  to  be  satis- 
factory. This  inspection  is  an  improvement 
upon  an  old  practice  of  asking  a  reference  to  an 
intimate  friend.  It  consists  of  making  inquiries 
through  the  commercial  agencies  or  otherwise 


268  BUSINESS  OF  LIFE  INSURANCE 

concerning  the  reputation,  habits,  condition  of 
life,  income,  general  state  of  health,  etc.,  of  the 
applicant,  and  several  of  the  companies  refuse 
to  issue  a  policy  under  any  circumstances  until 
a  satisfactory  report  has  been  received  through 
inspection. 

If  the  risk  is  not  deemed  first-class  by  the 
medical  department  the  course  in  different  com- 
panies varies.  In  some  companies  the  medical 
director  either  rejects  or  determines  precisely 
what  shall  be  done  concerning  issuing  a  policy 
with  an  extra  premium,  with  a  lien  charge,  or  on 
a  different  plan,  deemed  more  desirable  from 
the  standpoint  of  the  company.  In  former  days 
the  medical  director  had  all  to  say  about  this 
matter,  and,  as  has  already  been  stated,  his  pref- 
erence was  for  endowment  policies.  Nowadays, 
more  frequently  the  matter  is  referred  to  a  com- 
mittee, composed  usually  of  an  executive  officer, 
the  actuary  and  the  medical  director.  By  doing 
this  the  medical  director  is  relieved  of  some 
part  of  his  responsibility  and  the  benefit  of  the 
points  of  view  of  all  three  officers  is  obtained. 
In  consequence,  in  recent  years,  adjustments  to 
meet  the  conditions  of  impairment  in  the  life 
have  more  frequently  been  made  by  means  of 
liens  under  the  plan  which  has  already  been  de- 
scribed. 

When  the  matter  has  finally  been  disposed  of 
the  requisite  particulars  from  the  application 


APPLICATION  TO  DEATH-CLAIM  269 

are  passed  to  the  policy  clerk,  who  prepares  a 
policy  in  accordance.  This  work  is  clerical,  to 
be  sure,  but  is  a  matter  of  great  responsibility, 
especially  since  the  writing  in  of  guaranteed 
surrender  values  and  loans  has  been  introduced. 
The  work  of  checking  the  same  is  assigned  to  a 
clerk  or  official  of  a  higher  order,  who  is  held  to 
yet  stricter  accountability.  After  his  inspection 
the  policy  is  brought  to  one  of  the  executive  offi- 
cers, who  signs  it  and  transmits  it  to  the  agency 
department  of  the  company  to  be  sent  through 
the  usual  course  to  the  agent  for  delivery.  Most 
frequently  delivery  is  accomplished  by  the  agent 
in  person. 

After  delivery  a  life  insurance  policy  is  usual- 
ly not  referred  to  or  anything  done  about  it  until 
either  a  claim  arises  or  it  is  desired  to  surrender 
the  policy,  or  to  borrow  money  upon  it ;  but,  in 
the  meantime,  premiums  must  be  collected.  The 
laws  of  most  of  the  States  require  the  companies 
to  give  notice  of  the  falling  due  of  premiums  in 
a  special  manner,  which  is  strictly  adhered  to, 
record  being  made  of  the  same,  and  the  clerks 
being  prepared  when  their  memories  are  re- 
freshed by  these  records,  to  make  affidavit  that 
they  have  duly  mailed  the  required  notices, 
which  are  sent  out  not  less  than  one  month  be- 
fore the  premiums  are  due.  In  many  cases, 
though  by  no  means  in  all,  the  insured  is  en- 
titled to  one  month  after  the  due  date  of  the  pre- 


270  BUSINESS  OF  LIFE  INSURANCE 

mium  within  which  to  pay  the  same,  the  penalty 
being  that  he  must  pay  interest  upon  the  over- 
due premium. 

The  company  furnishes  its  collectors,  who  are 
usually  either  its  agents,  its  local  cashiers  or 
banks  through  which  it  makes  its  collections, 
with  premium  receipts,  already  filled  out,  and 
bearing  the  signature  of  an  executive  officer, 
but  invalid  unless  countersigned  as  authorised 
therein.  Save  in  exceptional  circumstances,  the 
policyholder  should  not  pay  his  premium  to  any 
person,  except  in  exchange  for  such  a  receipt, 
and  if  any  special  occasion  for  making  payment 
otherwise  should  arise  he  should  require  a  re- 
ceipt setting  forth  the  facts  and  stipulating  that 
the  company's  receipt  will  be  obtained  and  de- 
livered. 

In  applying  for  a  loan  upon  his  policy  the  in- 
sured should  first  examine  the  contract  itself 
and  see  what  provision,  if  any,  it  contains  con- 
cerning the  making  of  loans,  and  should  then 
comply  with  the  conditions  of  any  such  provi- 
sions strictly.  In  some  companies  loans  are  per- 
mitted only  at  the  end  of  policy  years ;  in  others 
they  may  be  had  on  demand  at  any  time.  The 
company  usually  has  a  loan  agreement  in  a  fixed 
form  which  it  requires  the  applicant  to  sign. 
Some  companies  provide  in  their  policies  or  loan 
agreements  that  the  advance  is  made  against  the 
sole  security  of  the  poliry^  so  that  under  no  cir- 


APPLICATION  TO  DEATH-CLAIM  271 

cumstances  can  there  be  a  claim  against  the 
policyholder.  This  is  a  wise  provision,  perhaps, 
but  in  practice  there  is  little  danger  that  loans 
within  the  amount  of  the  reserve  values  of  life 
insurance  policies  will  turn  up  as  personal  obli- 
gations beyond  what  can  be  realised  from  the 
insurance  company.  In  fact,  they  would  be 
treated  at  law  as  offsets,  precisely  as  a  deposit 
in  a  failed  bank  is  treated  as  an  offset  to  an  obli- 
gation owing  to  the  same  bank.  There  are  also 
two  other  reasons  why  no  especial  importance 
need  be  attached  to  this,  viz. :  first,  that  legal  re- 
serve life  insurance  companies  rarely  fail,  and 
when  they  do  there  is  usually  only  a  small  im- 
pairment of  the  reserve ;  and,  second,  that  these 
policy  loans  have  in  no  case  been  hypothecated 
or  sold  by  the  company. 

In  the  matter  of  surrender  values,  likewise, 
the  applicant  need  only  comply  strictly  with  the 
conditions  of  his  policy,  making  application  at 
the  proper  time  and  for  the  proper  form  of  sur- 
render value.  Usually  it  will  be  found  that  the 
company,  while  very  loth  to  have  him  cease  the 
payment  of  premiums,  will  facilitate  in  all  possi- 
ble ways  the  surrender  of  the  contract,  and  will 
put  no  obstacle  in  the  way  of  his  receiving  the 
full  value. 

In  earlier  times  the  making  out  of  proof  of 
loss  under  a  life  insurance  policy  was  a  matter 
of  considerable  difficulty.    The  American  com- 


272  BUSINESS  OF  LIFE  INSURANCE 

panies  require  a  great  deal  more  information 
than  is  customary  in  other  countries,  and  cer- 
tainly more  information  than  seems  to  be  abso- 
lutely requisite.  This  is  probably  with  a  view 
to  determining  more  accurately  the  cause  of 
death  for  statistical  purposes.  Usually,  how- 
ever, statements  on  the  part  of  the  beneficiary, 
the  physician  who  attended  the  deceased  in  his 
last  illness,  a  friend  of  the  deceased  who  was 
present  and  who  can  identify  the  body,  the  at- 
tending clergyman  and  the  undertaker  are  re- 
quired. These  certificates  are  given  under  oath, 
and  the  agents  of  the  companies  usually  give  all 
possible  assistance  in  obtaining  the  same,  for- 
warding them  and  securing  a  settlement  of  the 
claim.  Unless  there  are  legal  or  other  difficul- 
ties encountered,  settlement  is  nowadays  very 
prompt  on  the  part  of  the  companies,  and  indeed 
no  class  of  financial  institutions  takes  greater 
pride  in  meeting  obligations  promptly  and  in 
full  than  the  life  insurance  companies  through, 
out  the  world.  The  proofs  of  loss,  however,  are 
carefully  criticised  at  the  home  office,  and  if 
there  is  anything  which  excites  suspicion  that 
fraud  is  being  practised  or  that  the  claim  might 
be  paid  to  a  person  not  really  entitled  to  recover, 
the  proceedings  are  halted  and  a  careful  investi- 
gation is  made.  This  is  for  the  protection  of  the 
real  beneficiary's  interest  as  well  as  of  the  com- 
pany's. 


CHAPTER  XXVII 


INVESTMENT  OF  FUNDS 


Persons  who  misconceive  the  chief  function 
of  life  insurance  sometimes  speak  of  the  invest- 
ment of  its  funds  as  the  most  important  feature 
of  the  management  of  a  company.  This  is  not 
the  case,  perhaps,  but  the  sufficiency  of  the  rates 
of  net  premiums,  not  to  speak  of  the  proportions 
of  the  dividend  returns,  depends  upon  the  funds 
being  safely  invested  so  as  to  realise  at  least  as 
good  a  rate  of  interest  as  was  employed  in  com- 
puting these  premiums.  Consequently,  it  is  of 
the  first  importance  that  the  investments  be  safe 
and  remunerative. 

The  nature  of  their  contracts  with  their  pol- 
icyholders does  not  render  it  necessary  for  life 
insurance  companies  to  hold  their  funds  in  short 
term  or  call  loans,  as  must  commercial  banks  of 
deposit  which  receive  principally  deposits  sub- 
ject to  demand.  A  life  insurance  policy  matures 
but  once,  and,  aside  from  calls  for  loans  or  sur- 
render values,  one  payment — i.  e.,  at  maturity — 
is  all  that  the  company  is  required  to  make.  The 

27S 


274  BUSINESS  OF  LIFE  INSURANCE 

amount  of  money  required  from  time  to  time  to 
meet  the  claims  can  be  foretold  pretty  closely 
and  can  be  provided  for,  usually,  without  dis- 
turbing the  investments. 

Commercial  paper  also  is  nearly  everywhere, 
and  certainly  in  the  United  States,  deemed  an 
inappropriate  and  even  a  dangerous  investment 
for  life  insurance  companies  and  other  institu- 
tions which  are  not  liable  to  a  sudden  and  large 
demand  for  money,  and  which  in  consequence 
would  not  be  likely  to  keep  so  close  track  of  notes 
of  hand  and  the  responsibility  of  their  makers 
and  endorsers  as  do  banks  of  deposit.  Conse- 
quently, by  law  in  this  country  and  by  the  rules 
of  companies  elsewhere,  this  form  of  invest- 
ment is  proscribed. 

Life  insurance  companies  do  favour  other 
** quick"  investments,  however,  such  as  bonds 
and  stocks  which  are  quoted  in  the  exchanges, 
and  loans  upon  these  securities.  This  prefer- 
ence is  due  to  three  reasons,  at  least,  viz. : 

The  best  of  these  securities  look  particularly 
well  in  an  annual  statement  of  the  assets  and 
liabilities.  They  are  known  and  the  estimation 
of  their  value  in  the  market  is  known.  The  com- 
pany which  holds  many  of  them,  and  especially 
if  all  are  of  the  highest  character,  bearing  the 
top  quotations,  is  said  to  have  "gilt-edged"  as- 
sets, and  is  likely  to  be  preferred  in  a  contest. 

These   securities  are  very  easily  revalued, 


INVESTMENT   OF   FUNDS        275 

quotations  for  them  being  often  made,  and  for 
the  same  reason  an  opportunity  to  dispose  of 
them  at  a  profit  may  be  recognised  and  be  taken 
advantage  of. 

They  can  be  purchased  usually  in  large 
amounts,  and  even  then  little  independent  in- 
vestigation need  be  made  in  most  cases,  the  mar- 
ket rumours  and  the  published  reports  supply- 
ing what  is  required,  while  most  other  forms  of 
investments  call  for  much  more  trouble  and  an- 
noyance in  this  regard,  and  besides  are  offered 
in  much  smaller  amounts. 

The  dividend  or  interest  is  likely  to  be  paid 
punctually  and  in  a  convenient  manner,  as  in 
the  redemption  of  coupons,  at  a  minimum  of  ex- 
pense and  without  special  attention  to  details. 

They  are  readily  convertible  in  ordinary  times 
at  the  current  market  quotations  and  may  be 
realised  upon  in  short  notice. 

They  are  for  long  terms,  or,  in  the  case  of 
stocks,  permanent,  and  therefore  do  not  involve 
continual  reinvestment  of  the  funds. 

Some  of  these  advantages  are  of  great  mo- 
ment; others  of  little  or  none.  It  certainly  is 
advantageous  to  hold  investments  of  high  repu- 
tation for  long  terms  in  large  amounts  and  with 
regular  returns.  But  the  * '  convertible ' '  feature 
is  rather  detrimental  than  otherwise,  because  it 
is  no  more  necessary  that  life  insurance  invest- 
ments in  bonds  and  stocks  be  *' quick"  than  that 


276  BUSINESS  OF  LIFE  INSURANCE 

they  should  invest  in  commercial  paper,  and  in 
point  of  fact  in  times  of  general  financial  stress, 
when  a  company  naturally  might  desire  to  rea- 
lise, these  securities  cannot  be  disposed  of  with- 
out breaking  the  market,  so  that  this  feature 
often  proves  delusive. 

There  is  one  really  very  serious  objection 
to  the  investment  of  life  insurance  funds  in 
''quoted"  securities.  It  is  that  the  mere  fact 
that  they  are  quoted  disposes  managers  in  some 
cases  to  watch  the  market  closely  with  a  view  to 
buy  and  sell  to  advantage — in  plain  English,  to 
speculate  in  prices,  instead  of  merely  to  buy  for 
the  purpose  of  investment.  The  amount  of  this, 
however,  in  the  conduct  of  any  reputable  com- 
pany is  believed  to  be  small.  The  mere  fact  that 
it  can  be  done  and  indeed  is  easily  suggested  by 
the  conditions  has  played  a  part  in  introducing 
''underwriting  of  securities"  as  a  part  of  the 
investment  business  of  life  insurance  companies 
in  some  cases.  In  other  words,  these  companies 
subscribe  for  certain  portions  of  the  issues  of 
new  securities,  with  the  purpose  of  disposing  of 
some  or  all  of  them  to  others  at  a  profit.  This 
has  so  far  been  carried  on  profitably,  it  is  said, 
though  it  is  also  reported  that  some  of 
the  securities  taken  in  this  manner  could  not 
at  any  time  since  be  disposed  of  except  at  a  loss. 
The  whole  transaction  seems  so  foreign  to  the 
proper  business  of  a  life  insurance  company  that 


INVESTMENT   OF   FUNDS         277 

it  is  almost  impossible  to  believe  that  it  will  be 
defended  seriously  or  will  long  be  permitted. 
Underwriting  securities  is  a  branch  of  insur- 
ance, really,  and  one  that  should  be  undertaken 
by  companies  or  firms  that  make  it  their  sole  or 
at  least  their  chief  business.  Their  underwrit- 
ing margins  are  to  cover  a  risk,  and  life  insur- 
ance companies  are  instituted  to  provide,  not  for 
that  risk,  but  another,  and  their  funds  should 
not  be  exposed  to  unnecessary  hazard,  even  for 
a  consideration  believed  to  be  adequate. 

Another  objection  to  quoted  securities  is  that 
the  investment  yield  is  low.  Eeturns  upon  in- 
vestments which  are  equally  safe,  but  are  not  so 
well  known  nor  so  readily  convertible,  are  usual- 
ly considerably  higher.  In  other  words,  a  price 
is  paid  for  the  public  repute  and  the  converti- 
bility of  the  securities,  neither  of  which  is  really 
of  very  much  importance  to  a  life  insurance  com- 
pany. 

Otherwise,  investments  in  most  of  the  bonds 
which  are  usually  listed  on  the  exchange  are 
unexceptionable  and  indeed  of  the  most  desira- 
ble character.  Investments  in  stocks  are  on  a 
different  footing.  From  the  standpoint  of  per- 
manency they  are  preferable  and  in  some  cases 
the  returns  seem  to  be  quite  as  reliable  as  the 
yield  of  good  bonds  and  materially  larger.  Bu*, 
owing  to  the  modern  and  nearly  universal  cus- 
tom of  corporate  borrowing,  the  stock  is  usually 


278  BUSINESS  OF  LIFE  INSUEANCE 

postponed  as  a  security  upon  the  actual  proper- 
ties, to  one  or  more  issues  of  bonds.  In  conse- 
quence, the  variations  of  the  earnings  fall 
wholly  upon  the  stock,  and  in  the  event  of  wind- 
ing up  the  corporation  the  stock  is  worth  merely 
whatever  is  left  when  the  prior  liens  have  been 
satisfied.  Quoted  stocks,  therefore,  fluctuate  in 
market  values  much  more  than  do  the  values  of 
bonds.  These  facts  render  them  much  less  ac- 
ceptable as  investments  than  good  bonds  and  but 
a  small  part  of  the  funds  of  the  life  insurance 
companies  is  invested  in  them. 

All  stocks  are,  as  investments  for  life  insur- 
ance companies,  subject  to  at  least  one  very 
serious  objection,  viz.:  That  the  owner  of  a 
stock  is  virtually  engaged  in  the  business  con- 
ducted by  the  company  issuing  the  stock.  Life 
insurance  companies  were  incorporated  to  do  a 
life  insurance  business,  not  banking,  nor  rail- 
roading nor  gas  nor  electrical  lighting.  It  is, 
therefore,  somewhat  inconsistent  for  them  to 
engage  ''by  proxy,"  as  it  were,  in  other  lines  of 
business  by  becoming  the  purchasers  and  owners 
of  stocks.  On  this,  as  well'  as  other  grounds, 
Germany  has  forbidden  the  investment  of  life 
insurance  funds  in  stocks,  by  any  company  do- 
ing business  there,  and  accordingly  two  Ameri- 
can companies  are  now  subject  to  that  law.  Sev- 
eral others  voluntarily  exclude  stocks  from  their 
investments. 


INVESTMENT   OF   FUNDS        279 

An  illustration  of  the  fact  that  stock  invest- 
ments are  really  interests  in  limited  partner- 
ships is  that  the  holders  of  stocks  in  national 
and  some  other  banks  are,  in  the  event  of  the 
insolvency  of  the  banks,  liable  for  double  the 
amount  of  the  stock.  In  consequence,  one  class 
of  stocks,  and  that,  one  of  the  best,  is  thought 
by  many  to  be  peculiarly  inappropriate  for  the 
investment  of  life  insurance  funds. 

A  special  plea,  deserving  of  attention,  is  put 
forward  in  favour  of  investments  in  the  stocks 
of  banks  and  trust  companies  which  are  con- 
trolled or  largely  owned  by  the  life  insurance 
company.  The  argument  is  that  by  this  means 
the  life  insurance  company,  without  engaging 
in  underwriting  securities,  is  enabled  to  avail 
itself  of  the  confidential  information  and  expert 
assistance  of  companies  that  do  engage  in  that 
business,  and  so  to  buy  to  the  best  advantage. 
Doubtless  it  sometimes  works  that  way.  More- 
over, the  investments  in  these  stocks  have  often 
been  very  profitable  because  of  the  increase  in 
their  quoted  prices.  But  the  advantages  seem 
to  be  more  than  compensated  by  the  danger  that 
into  the  transaction  of  these  subsidiary  compa- 
nies with  the  life  insurance  company  may  enter 
the  temptation  to  use  the  latter  for  the  benefit 
of  the  former  and  thereby  for  the  benefit  of  their 
other  stockholders,  including  persons  who  are 
directors  in  both  companies.    Accusations  of 


280  BUSINESS  OF  LIFE  INSURANCE 

this  sort  have  been  made  and  it  is  but  reasonable 
to  suppose  that  they  have  some  foundation.  This 
form  of  investments  in  stocks  appears,  there- 
fore, to  be  open  to  at  least  as  many  objections  as 
other  investments  in  stocks. 

Perhaps  the  best  form  of  investments  in 
bonds  is  State,  municipal,  county,  town,  school 
district  and  other  bonds,  issued  for  public  pur- 
poses. Most  of  them  are  not  quoted  and  conse- 
quently are  not  subject  to  market  fluctuation. 
They  are  usually  for  long  terms  and  yield  a 
somewhat  better  interest  than  listed  bonds.  The 
amount  of  the  issue  is  sometimes  small,  though 
occasionally  large ;  but  a  purchaser,  by  bidding 
directly,  may  secure  the  entire  issue. 

There  are  some  objections  to  them,  however. 
There  has  been  repudiation  in  some  cases,  so 
that  the  validity  should  be  investigated  care- 
fully. In  some  localities  changes  in  the  business 
or  crop  conditions  have  ruined  districts,  towns, 
cities  or  counties  for  the  time  at  least  and  ren- 
dered the  bond  issues  of  doubtful  value.  There- 
fore, strict  investigation  of  the  financial  and 
economic  conditions  is  necessary.  All  this  means 
trouble  and  some  expense. 

Real  estate  mortgages  were  once  preferred  by 
all  American  life  insurance  companies.  When 
carefully  selected  they  should  cause  a  loss  of 
interest  but  seldom,  of  part  of  the  principal  yet 
less  frequently,  and  of  all  the  principal  never. 


INVESTMENT   OF   FUNDS         281 

While  a  very  large  part  of  the  investments  of 
some  companies  is  yet  in  real  estate  mortgages, 
and  some  part  of  the  investments  of  all,  they  no 
longer  occupy  first  place. 

Several  things  have  contributed  to  this  re- 
sult. The  land  "booms"  in  some  parts  of  the 
country  did  a  great  deal  to  discredit  real  estate 
investments  of  all  kinds.  The  slump  in  values 
in  some  of  the  larger  cities  in  1893  and  the  next 
year  or  so  was  also  not  without  effect  likewise; 
the  gradual  reduction  of  returns  upon  real  es- 
tate mortgages  of  the  choicest  character  has 
played  a  part. 

The  chief  cause  of  the  changed  attitude  of  the 
life  insurance  companies,  however,  is  believed  to 
be  the  very  great  increase  in  their  funds  and 
their  failure  to  organise  their  investment  de- 
partments with  the  same  thoroughness  as  their 
agency  departments,  for  instance.  Most  of  the 
companies  relied  upon  the  ordinary  local  real 
estate  agent  to  offer  mortgages,  and  so  suffered 
with  other  lenders  because  this  agent  could 
profit  only  by  securing  loans  for  his  customers 
and  so  had  an  interest  in  getting  them  through 
if  possible.  The  managers  of  the  life  insurance 
companies,  as  the  burden  of  caring  for  the  in- 
vestments became  heavier,  instead  of  systema- 
tising  the  work  and  extending  the  system 
throughout  the  country,  drew  in  their  lines  and 
adopted  a  system  of  concentrated  responsibility 


282  BUSINESS  OF  LIFE  INSURANCE 

which  called  for  larger  loans  than  the  average 
mortgage  loan  that  was  offered.  The  result  was 
that  loans  for  less  amounts,  especially  in  smaller 
cities,  villages  and  the  open  country,  were  neg- 
lected, and,  while  the  interest  realised  by  the 
principal  companies  was  tending  downward  to- 
ward 4  per  cent,  in  many  parts  of  the  country, 
East  and  West,  the  money  famine,  as  to  small 
loans  upon  real  estate,  was  such  that  from  6  per 
cent,  to  8  per  cent,  or  more  could  be  had  upon 
security,  quite  as  good  in  point  of  fact  as  that 
behind  the  best  bonds. 

Millions  of  dollars  of  these  loans  were  taken 
over  by  building  and  loan  associations  at  rates 
of  interest  far  beyond  the  legal  standard,  this 
being  allowed  in  these  mutual  societies,  and 
some  of  them  at  rates  so  exorbitant  as  to  mean 
ruin  for  borrowers.  But,  with  one  noteworthy 
exception,  the  important  American  companies, 
including  even  those  which  did  not  virtually  dis- 
card this  form  of  investment,  failed  to  appre- 
ciate the  conditions.  The  one  exception  referred 
to  is  to-day  realising  nearly  6  per  cent,  and  has 
lifted  itself  thereby  into  the  foremost  ranks  in 
rates  of  dividends  to  policyholders. 

A  large  American  company,  long  an  advocate 
of  real  estate  loans  and  of  avoidance  at  all  haz- 
ards of  fluctuating  securities,  once  had  the  en- 
tire West  for  a  field  for  small  mortgage  loans, 
and  by  reason  of  considering  all  applications 


INVESTMENT   OF  FUNDS        283 

directly,  and  refusing  to  permit  loans  to  be  nego- 
tiated through  agents  who  charged  a  commis- 
sion, was  in  a  fair  way  to  become  the  first  choice 
of  all  discerning  borrowers.  Then  the  bother 
question  came  to  the  front,  under  a  new  invest- 
ment manager,  and  the  funds  grew  to  such 
dimensions  that  a  better  system  was  needed; 
this  problem  was  solved  by  dodging  it,  i.  e.,  by 
abandoning  the  small  loan  field  and  lending  only 
in  comparatively  large  amounts  mainly  in  cities 
and  where  trustees  could  inspect  the  property. 
And  now  this  company  reports  gross  interest 
returns  of  only  a  little  over  4  per  cent,  and  has 
lo^st,  perhaps  irretrievably,  its  one-time  reputa- 
tion of  being  easily  the  foremost  American  com- 
pany in  dividends  to  policyholders.  When  it 
thus  feebly  let  itself  be  parted  from  the  recom- 
mendation to  small  borrowers  upon  real  estate 
security,  that  from  it  they  could  obtain  money 
without  paying  commissions  to  loan  agents,  it 
lost  one  of  its  most  valuable  assets. 

Our  great  financiers,  whether  in  life  insurance 
companies  or  in  other  institutions,  have  reason 
to  blush  for  the  manner  in  which  they  have  dealt 
with  this  most  promising  field  of  mortgage 
loans.  The  achievements  of  the  Credit  Foncier, 
of  Paris,  with  $350,000,000  in  small  real  estate 
loans  throughout  France  and  Algiers  and  $350,- 
000,000  more  in  loans  to  municipalities  and  other 
government  corporations,  all  on  easy  terms,  pro- 


284  BUSINESS  OF  LIFE  INSURANCE 

cured  without  the  payment  of  commissions  and 
repayable  by  frequent  instalments,  really  put 
us  to  shame.  One  of  its  chief  assets,  also,  has 
always  been  the  absence  of  the  intervention  of 
loan  agents,  with  their  demands  for  commis- 
sions ;  but,  though  there  are  many  other  valua- 
ble features  in  its  conduct  of  the  business,  the 
most  effective  one  has  been  the  system  which  re- 
sulted in  small  loans  being  available  without  loss 
of  safety  and  with  a  considerable  increase  of 
profit. 

The  laws  of  every  State  permit  real  estate 
loans,  but  under  varying  restrictions,  ranging 
from  loans  on  real  property,  improved  or  unim- 
proved, worth  40  per  cent,  more  than  the  sum 
advanced,  according  to  the  new  law  of  Cali- 
fornia, to  loans  on  improved  property  only, 
worth  at  least  100  per  cent,  more  than  the  sum 
loaned,  and  not  counting  improvements  if  the 
real  estate  is  a  farm.  The  provision  against 
loans  upon  unimproved  property  was  born  of 
wisdom,  derived  from  bitter  experience  in  ear- 
lier days  when  the  exploitation  of  town  and  sub- 
urban lots  was  undertaken  in  this  manner,  to 
the  ruin  of  companies. 

Loans  upon  their  own  policies  form  no  incon- 
siderable part  of  the  investments  of  life  insur- 
ance companies  nowadays.  These  loans  are  the 
safest  of  all  securities  when  within  the  amounts 
of  the  reserves  upon  the  respective  policies,  for 


INVESTMENT  OF  FUNDS         285 

the  reserves  upon  all  life,  limited-payment  and 
endowment  policies  increase  continually  and  the 
loan  is  therefore  secured  by  a  liability  on  the 
part  of  the  company  on  account  of  the  policy  of 
at  least  equal  amount. 

All  the  life  insurance  companies  in  this  coun- 
try now  allow  cash  loans  upon  their  policies ;  but 
it  is  a  matter  of  recent  date  that  some  of  them 
bitterly  contested  the  propriety  of  this  and  re- 
fused to  permit  it.  The  contention  was  that  it 
was  tempting  the  insured  to  trifle  with  the 
sacred  interests  of  the  beneficiary.  In  very  many 
cases,  of  course,  loans  are  taken  in  order  to  sus- 
tain-the  protection,  and  in  any  event  the  insured, 
with  his  duties  as  husband  or  father,  must  be 
trusted  to  decide  for  himself. 

In  earlier  days  investments  of  the  funds  in 
commuted  commissions  or  in  advances  to  agents 
against  their  renewal  commissions  were  com- 
mon features  in  the  statements  of  companies. 
Nowadays  the  latter  item  is  still  seen  now  and 
then,  but  it  is  not  of  much  importance  and  most 
frequently  reported  among  the  '* non-admitted" 
items. 

Items  which  are  found  in  the  assets  of  British 
and  foreign  but  not  of  American  companies,  are 
life  interests  and  reversions  purchased  and 
owned,  or  loans  upon  the  same.  These  forms  of 
investments  are  peculiarly  suitable  for  life  in- 
surance companies  which  have  the  knowledge  of 


286  BUSINESS  OF  LIFE  INSURANCE 

the  exigencies  of  life  and  survival  that  would 
enable  proper  valuation  of  such  securities.  But 
opportunities  for  making  these  investments  are 
uncommon  here,  and  besides,  the  State  laws 
usually  make  no  provision  for  them. 


CHAPTER  XXVIII 

LESSONS     FEOM     THE     CREDIT     MOBILIER    AND     THE 
CREDIT    FONCIEB 

All  students  of  American  financial  history 
are  familiar  in  some  degree  with  the  career  of 
the  Credit  Mobilier  of  America.  It  was  organ- 
ised to  *' underwrite,'*  though  the  word  was 
scarcely  known  in  those  days,  the  securities  of 
the  Pacific  railroad  companies,  and  its  colossal 
failure,  after  involving  more  than  one  states- 
man in  its  corrupt  manoeuvres,  made  the  very 
name  a  stench  and  a  byword  throughout  the 
country,  and  indeed  throughout  the  world. 

At  the  time  it  was  organised  an  institution 
with  a  similar  name  was  in  the  same  kind  of 
business  with  Paris  as  its  headquarters,  and  in- 
deed its  apparent  success  was  the  proximate 
cause  of  the  organisation  of  the  American  com- 
pany. The  French  institution  lived  longer,  but 
in  its  own  good  time  went  to  pieces  also. 

One  needs  not  to  be  told,  perhaps,  that  each 
of  these  concerns  was  organised  and  conducted 
by  men  who  obtained  their  chief  profits,  not  in 

287 


288  BUSINESS  OF  LIFE  INSURANCE 

dividends  upon  their  investments  in  its  stock, 
but  in  gains  from  the  promotion  of  other  com- 
panies and  the  sale  of  their  stocks  by  this  sys- 
tem of  underwriting.  In  other  words,  the  officers 
and  directors  had  interests  adverse  to  the  in- 
terests of  the  stockholders,  and,  however  much 
they  may  have  tried  to  hold  the  balances  even, 
they  could  not  and  did  not  fail  to  look  out  for 
themselves  first.  In  other  words,  their  selfish 
ends  blinded  them  to  the  duties  of  their  trust 
and  also  to  the  inevitable  consequences  of  their 
conduct. 

The  similarity  of  these  conditions  to  those 
which  are  beginning  to  put  in  an  appearance  in 
life  insurance  will  not  fail  to  be  observed.  In  a 
large  company,  of  late  under  investigation  and 
much  before  the  public  eye,  the  controlling  stock 
interest  could  secure  in  dividends  only  a  pitiful 
7  per  cent,  on  the  par  value  of  $50,100,  i.  e., 
$3,507  in  dividends.  Of  course,  control  brought 
also  the  power  to  vote  salaries;  but  if  used  to 
vote  salaries  that  were  not  fully  earned,  this  also 
became  an  adverse  interest.  But  the  chief  ad- 
verse interest  is  said  to  have  been  in  the  pur- 
chase of  investments  which  amounted  virtually 
to  underwriting  securities  in  which  the  owners 
of  the  controlling  interest  in  the  stock  were  in- 
terested also,  or  in  buying  securities  underwrit- 
ten by  them.  This  is  not  merely  very  like  the 
** underwriting^'  in  the  Credit  Mobilier  days,  but 


CREDITS  MOBILIER  AND  FONCIER  289 

in  some  regards  is  more  alarming,  for  life  in- 
surance funds  were  not  embarked  for  this  pur- 
pose, as  were  the  funds  of  the  Credit  Mobilier, 
but  instead  as  the  security  for  the  most  sacred 
of  all  trusts,  that  of  provision  for  those  whom 
the  death  of  husband  or  father  leaves  defence- 
less against  want.  Moreover,  the  men  who  thus 
serve  with  a  divided  allegiance  have  by  no 
means  so  extensive  interests  at  stake  in  the  life 
insurance  companies,  the  funds  of  which  they 
thus  manipulate,  as  the  promoters  and  chief 
owners  of  either  Credit  Mobilier  possessed.  In- 
deed, their  legitimate  interests  in  the  life  insur- 
ance company  are  frequently  very  small  in  com- 
parison with  their  gigantic  interests  in  the  un- 
dertaking that  may  be  served  by  the  purchases 
or  underwriting  of  securities. 

For  this  majority  interest  it  is  reported  that 
several  million  dollars  have  been  paid.  If  so,  it 
may  well  be  asked :  By  what  means  are  returns 
upon  such  an  investment  expected  to  be  rea- 
lised? 

Notwithstanding  the  public  outcry  of  financial 
sensationalists  and  also  notwithstanding  the 
undeniable  fact  that  there  have  been  some  irreg- 
ularities in  this  regard,  it  is  not  true  that  any 
very  considerable  amount  of  this  sort  of  thing 
has  as  yet  been  indulged  in.  The  evil  has  been 
exposed  in  its  very  infancy,  and,  if  extirpated 
now,  no  great  injury  will  result.    There  has  been 


290  BUSINESS  OF  LIFE  INSURANCE 

no  serious  loss  to  any  company,  nor  is  there 
likely  to  be,  so  far  as  can  be  foretold,  because 
of  investments  already  in  hand.  But  it  is  plain 
that  the  greatest  possible  perils  attend  the  sys- 
tem, which  cannot  too  soon  be  wholly  abandoned 
nor  legal  barriers  be  too  soon  erected  against 
even  the  possibility  of  its  again  effecting  an 
entrance. 

It  came  about  innocently  in  a  way;  on  which 
account  it  would  be  possible  to  judge  too  rigor- 
ously the  men  who  have  been  led  to  participate 
in  it.  As  these  companies  became  larger  and 
larger,  the  investment  problem  grew  more  and 
more  serious.  The  chief  officers,  accustomed, 
while  the  companies  were  smaller,  to  keep  a 
sharp  oversight  upon  all  investments,  found  this 
very  difficult,  especially  when  there  were  many 
small  loans  or  purchases.  The  inclination  to 
depend  more  and  more  upon  the  public  estimate, 
as  reflected  by  the  stock  quotations  and  the  bond 
market,  grew  upon  them.  Soon  they  came  to 
rely  largely  upon  the  advices  of  particular  per- 
sons whom  they  knew  and  trusted,  and  to  prefer 
investments  that  were  presented  by  certain  per- 
sons in  whom  they  had  confidence,  and  especially 
did  they  feel  safe  concerning  investments  in  the 
securities  of  companies  in  which  they  were 
themselves  interested  and  about  which  they  felt 
that  they  were  well  informed.  Besides,  when 
the  company  invested  "heavily  in  the  securities 


CREDITS  MOBILIER  AND  FONCIER  291 

of  a  given  corporation,  it  was  but  natural  that 
its  officers  should  do  so  likewise,  and  then  only- 
reasonable  that  the  company's  interests  and 
theirs  should  secure  a  voice  in  the  management 
of  that  corporation — a  few  places  as  directors, 
for  instance.  And  then,  as  between  two  invest- 
ments equally  good  and  paying  the  same,  why 
not  favour  friends  above  strangers?  And  so 
through  the  whole  psychological  path  which 
leads  to  financial  devilment  and  along  which 
men  have  travelled  to  the  betrayal  of  sacred 
trusts,  ever  since  such  trusts  have  been  known 
among  men.  Fortunate  are  the  people  of  Amer- 
ica that  exposure  came  so  early  that  the  ill  can 
easily  be  cured,  leaving  the  great  life  insurance 
funds  intact  and  ample  to  protect  the  defence- 
less dependents  for  whom  they  were  built  up 
painfully  by  devoted  husbands,  fathers,  sons 
and  brothers. 

But  a  few  things  are  required  to  accomplish 
this :  Greater  publicity  in  annual  reports  so  as 
to  show  the  entire  movement  of  a  company's  in- 
vestments each  year  in  detail,  prohibition  of  in- 
vestments in  stocks  or  rigorous  restrictions 
upon  the  same,  conditions  governing  invest- 
ments in  corporate  bonds  similar  to  those  en- 
forced in  the  case  of  savings  banks,  and  disqual- 
ification, enforced  strictly  in  all  cases,  of  all 
directors  of  a  life  insurance  company  who 
profit   directly   or  indirectly  by   the   sale   of 


292  BUSINESS  OF  LIFE  INSURANCE 

securities  to  the  company  or  by  loans  made 
by  it. 

This  is  but  one-half  the  story,  however,  the 
moral  of  which  is  pointed  by  the  failure  of  the 
two  Credits  Mobilier;  the  other  half  tells  of  lost 
opportunities  that  may  be  availed  of  still,  per- 
haps, and  its  moral  is  pointed  by  the  success  of 
the  Credit  Foncier,  also  of  Paris.  The  earlier 
career  of  that  company  was  the  cause  of  the  for- 
mation of  the  French  Credit  Mobilier  on  lines 
that  were  superficially  similar. 

The  Credit  Foncier  was  organised,  however, 
to  earn  dividends  for  its  stockholders  by  per- 
forming an  important  service  and  with  no  ulte- 
rior motive  or  expectation  of  profit,  in  which,  as 
in  the  system  that  grew  out  of  it,  it  was  radically 
different  from  the  later  imitations. 

The  purpose  was  to  carry  to  the  holders  of 
small  estates,  whether  in  town  or  country,  some 
part  of  the  benefits  in  lower  rates  of  interest 
which  attend  securities,  issued  in  large  amounts, 
backed  by  ample  capital  and  sold  and  quoted 
upon  the  Bourse.  This  was  and  is  done  in  the 
following  manner : 

The  Credit  Foncier  guarantees  its  bonds  by 
its  capital  and  surplus  and  also  by  the  deposits 
of  mortgages  taken  by  it,  being  a  first  lien  upon 
real  estate  in  France  or  Algiers,  or  the  bonds  of 
public  corporations  generally  classed  as  "mu- 
nicipal."     The   bonds    are    issued    in    series, 


CREDITS  MOBILIER  AND  FONCIER  293 

one  at  a  time,  and  at  a  rate  of  interest 
that  will  cause  them  to  sell  just  under  par, 
thus  assuring  that  the  lowest  interest  rate 
possible  has  been  secured.  Applications  for 
loans  are  received  from  all  parts  of  France 
and  Algiers,  no  commission  being  paid  nor  in 
any  case  permitted  to  be  paid  for  their  procure- 
ment. These  applications  are  considered  upon 
their  merits.  Loans  are  granted  only  upon  the 
amortisation  plan,  i.  e.,  on  the  basis  of  an  equal 
payment  every  six  months  which  will  in  a  given 
period  of  years  repay  the  loan,  principal  and 
interest.  The  security  is  deposited  specially  for 
the  guaranty  of  the  bonds  of  this  series,  which 
are  also  guaranteed  generally  as  stated,  by  the 
entire  capital  and  surplus.  When  a  loan  is  grant- 
ed the  Credit  Foncier  gives  its  bonds  of  that 
series,  instead  of  cash.  The  borrower  must  sell 
these  bonds,  paying  a  broker's  commission 
therefor,  in  order  to  realise ;  but  this  is  his  only 
expense  cost,  excepting  for  the  execution  of 
papers  and  examination  of  title. 

The  money  received  from  borrowers  in  this 
series  is  applied  first  to  meet  the  interest  on  the 
bonds  of  that  series.  The  remainder  is  employ- 
ed to  redeem  bonds  of  that  series  at  par  and  ac- 
crued interest,  as  also  are  the  proceeds  of  any 
sales  of  property  taken  upon  foreclosure. 

Originally  its  charter  permitted  the  Credit 
Foncier  to  add  30-100  per  cent,  of  the  principal 


294  BUSINESS  OF  LIFE  INSURANCE 

sum  borrowed  to  the  net  semi-annual  payment 
required  to  repay  the  loan  in  the  term  agreed 
upon,  computed  at  the  same  rate  of  interest  as 
the  bonds  bear;  but  this  margin,  equivalent  to 
1.20  per  cent,  per  annum  or  thereabout,  on  the 
average^  upon  the  mean  principal  outstanding, 
proved  larger  than  was  necessary,  and  it  was 
later  cut  to  a  fixed  addition  to  the  rate  of  inter- 
est upon  the  bonds  of  6-10  per  cent.,  the  semi- 
annual gross  rates  to  be  figured  at  that  rate  of 
interest. 

On  this  basis  the  earnings  of  the  Credit  Fon- 
cier  enable  dividends  at  15  per  cent,  per  annum 
to  be  paid  upon  its  immense  capital,  which  must 
be  kept  at  10  per  cent,  of  its  outstanding  bonds, 
and  is  now  about  $75,000,000.  There  is  little 
doubt  that  in  the  United  States,  had  such  an  in- 
stitution been  founded  and  been  guarded  in  a 
similar  manner,  much  greater  things  would  have 
been  accomplished — and  may  yet  be  accomplish- 
ed. In  France  and  Algiers  the  operations  have 
been  extended  also  to  investments  in  municipal 
bonds  and  similar  securities  on  a  like  principle 
of  instalment  repayments,  and  a  recent  state- 
ment of  this  greatest  of  all  financial  institutions 
shows  assets  of  over  $750,000,000,  of  which  over 
$350,000,000  represents  real  estate  loans,  aver- 
aging only  about  $11,000  each,  and  about  $350,- 
000,000  represents  bonds  as  stated.  The  re- 
mainder is  cash  and  convertible  securities,  ik^ 


CREDITS  MOBILIER  AND  FONCIER  295 

charter  providing  that  the  surplus  shall  be  in- 
vested in  that  manner. 

But  the  purpose  of  this  description  is  to  indi- 
cate what  might  have  been  done  here  by  our  life 
insurance  companies,  had  they  perfected  a  gen- 
eral investment  system  so  as  to  acconunodate 
the  needs  of  small  borrowers,  whether  individ- 
ual or  municipal,  instead  of  making  of  them- 
selves in  some  degree  adjuncts  of  the  stock  and 
bond  markets,  bidding  down  the  prices  of  the 
quoted  securities  of  the  highest  reputation  and 
constantly  tempted  to  be  satisfied  with  some- 
thing not  so  good. 

No  other  class  of  institutions  in  the  United 
States  could  so  well  have  undertaken  **  instal- 
ment loans"  on  real  property  as  the  life  insur- 
ance companies.  Their  premium-collecting  de- 
partments could  easily  have  made  these  collec- 
tions also.  Their  actuaries  possessed  the  re- 
quisite mathematical  skill  to  compute  rates  of 
payments  and  the  amounts  required  to  pay  off 
loans  before  maturity,  as  well  as  to  value  them 
each  year  for  the  annual  statement.  All  that 
has  ever  been  needed  was  a  recognition  of  the 
possibilities  and  benefits  of  a  method  which 
helps  a  man  to  get  his  debt  repaid,  both  from  the 
standpoint  of  the  lender  and  the  borrower,  and 
the  introduction  of  a  thorough  system  which 
would  enable  small  loans  to  be  handled  with  a 
minimum  of  expense  and  risk.    Had  this  been 


296  BUSINESS  OF  LIFE  INSURANCE 

perfected  fifty  years  ago  the  shameful  ''western 
mortgage"  fiasco  would  have  been  avoided  and 
a  stability  in  real  estate  values,  as  yet  not  rea- 
lised in  this  country,  would  have  been  obtained. 
So  great  has  been  the  real  need  for  it  and  such 
the  recognition  of  that  need  on  the  part  of  the 
borrowers  that  building  and  loan  associations, 
often  with  usurious  rates  of  interest  and  some- 
times with  misleading  and  even  fraudulent 
plans,  were  formed  to  supply  the  want.  Despite 
all  setbacks,  these  are  now  estimated  to  hold  no 
less  than  $150,000,000  of  loans,  which  are  being 
repaid,  usually  on  a  sinking  fund  plan,  by  in- 
stalments. This  ''sinking  fund"  is  an  invest- 
ment in  the  stock  of  the  association  which  at  ma- 
turity pays  off  the  loan,  but  in  the  meantime  no 
part  is  really  applied  in  reduction  of  the  princi- 
pal. 

Life  insurance  companies  could  have  supplied 
these  loans  on  the  basis  of  gradual  reduction  of 
the  principal  outstanding,  and  they  ought  to  be 
doing  so,  for  investments  so  profitable  and  so 
thoroughly  suited  to  their  requirements  are  few, 
indeed.  Had  they  done  this,  the  principle  would, 
no  doubt,  have  been  extended  long  ago  to  mu- 
nicipal loans,  including  loans  to  the  humblest 
school  district  as  well  as  loans  for  the  taking 
over  of  public  utilities  by  great  cities,  the  pay- 
ments upon  which  would  be  made  out  of  the  cur- 
rent earnings.    Thus,  too,  great  public  problems 


CREDITS  MOBILIER  AND  FONCIER  297 

of  irrigation  and  drainage  might  long  ago  have 
been  solved  by  large  districts.  Instead,  we  have 
at  the  best  our  municipalities  setting  up  pitiful 
sinking  funds,  sometimes  buying  in  their  own 
bonds  at  a  premium  or  recklessly  making  no 
provision  whatever  for  repayment  and  rashly 
depending  upon  never-failing  ability  to  renew. 
The  city  of  Paris  long  ago  learned  the  lesson 
from  the  operations  of  the  Credit  Foncier,  floats 
its  own  bonds  on  the  amortisation  plan,  pledg- 
ing certain  revenues  for  their  redemption,  and 
thus  saves  the  margin  charged  for  the  guaranty. 

Practically  the  entire  field  of  small  loans  upon 
real  estate  and  loans  to  small  and  even  to  most 
of  the  larger  municipalities  ought  to-day  to  be- 
long to  the  life  insurance  companies  and  would 
have  been  theirs,  paying  at  least  one  per  cent, 
better  interest  than  they  now  earn,  had  they 
cultivated  systematically  the  people  at  large 
with  instalment  loans  instead  of  "the  street'* 
with  call  loans  and  purchases  of  convertible 
securities. 

All  the  companies  have  done  in  this  direction 
is  as  follows : 

In  an  early  day  some  of  them  made  loans  on 
real  estate,  with  endowment  policies  as  collat- 
eral security,  the  maturity  of  the  endowment  re- 
paying the  loan.  Their  excessive  dividend  esti- 
mates soon  rendered  the  plan  unpopular,  es- 
pecially as  they  used  them  as  a  cover  for  charg- 


298  BUSINESS  OF  LIFE  INSURANCE 

ing  an  excessive  rate  of  interest  upon  tlie  loan. 
Repayments  before  maturity,  little  or  nothing 
being  allowed  upon  surrender  of  the  endowment 
policy,  did  not  increase  the  popularity  of  the 
plan,  which  had  to  be  abandoned.  In  one  west- 
ern state  the  scandal  became  so  great  that  a  law 
was  passed  prohibiting  the  requirement  of  life 
insurance  policies  as  collateral  to  real  estate 
loans. 

Various  attempts  have  been  made,  either  by 
means  of  endowment  policies  as  collateral,  of 
** redemption"  schemes  or  "endowments  in  ad- 
vance," to  get  a  larger  rate  of  gain  out  of  the 
borrower  than  he  understands  that  he  is  paying. 
Each  of  these  has  deservedly  come  to  grief.  The 
bad  faith,  as  well  as  the  excessive  burden,  as- 
sured that. 

Life  insurance  companies  could  make  these 
loans  safely  and  profitably,  either 'with  the  obli- 
gation to  be  cancelled  in  event  of  death  before 
repayment  is  complete  or  wholly  without  insur- 
ance, and,  were  they  to  do  so,  we  should  hear 
little  of  the  difficulty  of  obtaining  safe  and  re- 
munerative investments  which  now,  it  is  said, 
drives  companies  into  underwriting  schemes; 
and,  while  serving  themselves,  the  companies 
would  also  be  performing  a  great  and  valuable 
service  for  the  public  and  extending  and  con- 
firming their  hold  upon  the  people's  confidence 
and  good  will.  All  that  is  required  is  that  the 


CREDITS  MOBILIER  AND  FONCIER  299 

managers  and  directors  cast  aside  unwarranted 
timidity  and  their  inherited  notion  of  personally 
inspecting  every  investment,  and  with  an  eye 
single  to  the  fulfilment  of  their  trust,  proceed 
to  construct  upon  well-tried  lines  a  system  which 
will  distribute  their  investments  throughout 
their  fields  of  operations,  among  the  people 
whose  funds  are  in  their  hands. 

If  they  do  this  the  possibilities  are  limitless; 
if  they  do  not,  but  instead  persist  in  a  course  of 
concentration,  other  institutions,  probably  pure- 
ly financial,  will  surely  seize  the  opportunity 
which  they  let  slip  and  in  time  will  pass  them  in 
the  race  for  bigness  as  well. 


CHAPTER  XXIX 

EEOEGANISATION    OF    ASSESSMENT    INSURANCE    SO- 
CIETIES 

The  ** business  assessment  associations,"  that 
is,  assessment  societies  of  the  class  which  do  not 
make  use  of  the  fraternal  lodge  feature,  were 
compelled  to  begin  reorganisation  much  earlier 
than  the  fraternal  societies,  although  they  were 
organised  at  a  later  date.  This  was  due  in  large 
part  to  the  pressure  of  their  comparatively 
heavy  expenses,  but  also  in  part  to  the  fact  that 
business  men  were  in  control,  who  saw  that  their 
own  emoluments  would  soon  be  cut  off  by  the 
failure  of  the  associations  unless  a  change  of 
plan  could  be  brought  about. 

The  earliest  attempt  to  escape  from  the  faulty 
assessment  system  was  by  means  of  the  adop- 
tion of  a  premium  which  was  expected  to  be 
level,  but  without  any  good  ground  for  the  ex- 
pectation— that  is  to  say,  a  scale  of  premiums 
was  put  into  effect  so  far  as  new  members  were 
concerned  which  produced  for  the  time  a  con- 
siderable surplus,  but  no  pains  were  taken  to 

300 


ASSESSMENT  REORGANISATION  301 1 

assure  that  the  same  could  be  held  level  through- 
out life.  Several  of  the  more  important  assess- 
ment associations  made  use  of  this  device,  leav- 
ing their  old  members  upon  rates  already  known 
to  be  insufficient,  and  in  some  cases  actually 
drawing  upon  the  funds  contributed  by  the  new 
members,  in  excess  of  mortality  claims  under 
their  policies,  to  help  out  the  deficiencies  in  the 
payments  of  older  members. 

In  but  one  or  two  cases  was  there  even  an  at- 
tempt made  to  ascertain  whether  this  provision 
would  be  sufficient  on  the  basis  of  a  certain  lapse 
rate  being  experienced.  One  association  was  or- 
ganised to  do  business  with  rates  based  upon 
such  an  assumption,  and  its  transfer  into  a  regu- 
lar legal  reserve  life  insurance  company  did  not 
prove  to  be  a  difficult  thing,  although,  in  point 
of  fact,  the  experiment  with  this  system  of  in- 
surance was  not  wholly  successful.  In  most 
cases,  however,  the  premium,  which  came  to  be 
called  "a  stipulated  premium,"  was  fixed  in 
some  haphazard  manner,  such  as  by  adding  a 
certain  amount  per  $1,000  insurance  to  the  one- 
year  term  premium  or  even  a  percentage  of 
itself,  thereafter  failing,  of  course,  to  have  the 
premiums  increase  as  the  insured  became  older. 

The  accumulation  of  funds,  however,  under 
these  provisions  for  a  time  gave  a  standing  and 
credit  to  some  of  these  associations  which  was 
not  deserved  and  could  not  be  maintained.    The 


302  BUSINESS  OF  LIFE  INSURANCE 

failure  to  readjust  the  rates  for  the  older  mem- 
bers after  a  time  caused  large  inroads  to  be 
made  upon  the  accumulations,  and  when  disso- 
lution began  its  course  was  very  rapid.  A  large 
association  in  the  West  which  had  sailed  under 
the  colours  of  Freemasonry,  and  another  in  Mas- 
sachusetts, failed  to  grapple  with  the  conditions 
in  a  serious  manner  early  enough,  and  in  conse- 
quence were  compelled  to  go  out  of  business,  the 
former  by  means  of  a  reinsurance  and  a  re- 
ceivership, and  the  latter  by  being  wound  up 
under  a  receivership. 

This  obviously  fallacious  and  misleading  plan 
received  unexpected  endorsement  in  very  high 
quarters,  when  the  Legislature  of  the  State  of 
New  York  passed  what  is  known  as  "The  Stipu- 
lated Premium  Law,"  approved  by  the  insur- 
ance department  of  the  State,  and  indeed  re- 
garded as  practically  a  department  bill.  This 
law  was  requested,  it  is  understood,  by  one  of 
the  larger  assessment  associations,  domiciled  in 
New  York,  that  alone  took  advantage  of  its  pro- 
visions, which  were  that,  while  the  usual  re- 
serves should  be  required  as  to  limited  payment 
policies,  in  the  case  of  whole  life  policies  with 
level  premiums  the  requirement  should  be  only 
that  the  company  hold  at  all  times  a  reserve 
equal  to  the  net  premium  for  one-year  term  in- 
surance at  the  attained  age.  In  other  words,  a 
whole  life  policy  was  to  bo  valued  as  if  it  were  a 


ASSESSMENT  REORGANISATION   303 

renewable  one-year  term  policy  with  increasing 
premiums,  although  the  premiums  were  not  to 
increase  and  were  to  be  held  out  to  the  members 
as  level  for  life.  Since  the  reserve  is  merely  that 
sum  which  is  absolutely  required,  together  with 
future  level  net  premiums,  to  keep  them  level 
and  to  meet  the  future  costs  of  the  insurance, 
this  was  tantamount  to  giving  the  Staters  certifi- 
cate of  solvency  to  an  institution  which,  in  the 
nature  of  things,  would  not  be  able  to  carry  out 
its  engagements  by  holding  the  assets  and  col- 
lecting the  premiums  which  the  State  was  certi- 
fying would  enable  it  to  carry  them  out.  That 
such  a  law  could  have  received  the  approval  of 
the  insurance  department  of  an  important  State 
is  an  astonishing  thing,  not  easily  explained. 

There  was  no  requirement  that  the  premium 
to  be  collected  should  be  equal  to  the  level  net 
premium  required  according  to  the  standards  of 
mortality  and  interest  set  up  by  the  law  itself. 
It  was,  in  consequence,  entirely  possible  for  an 
association  to  carry  on  its  business,  claiming  to 
be  a  life  insurance  company  with  full  reserves 
as  required  by  the  laws  of  the  State  of  New 
York  and  as  certified  by  its  superintendent  of 
insurance,  which,  in  point  of  fact,  neither  had 
sufficient  reserves  nor  charged  sufficient  pre- 
miums. Had  the  provision  been  carried  out  lit- 
erally it  would  have  called  for  twice  the  reserves 
proper  to  a  one-year  term  policy — that  is,  for  a 


304  BUSINESS  OF  LIFE  INSURANCE 

policy  for  one  year  only,  or  for  a  longer  time 
with  the  rate  increasing  each  year  as  the  age  in- 
creases. The  actuaries  of  the  department,  how- 
ever, were  reasonable  men  and  so  construed 
this  requirement  to  mean  merely  that  the 
usual  one-year  term  reserve  was  called  for. 
This  was  a  sensible  view  to  take,  because,  from 
a  scientific  standpoint,  otherwise  the  law  could 
mean  nothing.  Thus  construed,  it  meant  that 
these  policies  were  to  be  treated  as  renewable 
one-year  term  policies,  although  they  were  not 
of  this  character,  and  such  construction  was 
wholly  wrong. 

It  looked  for  a  time  as  if  this  madness  was 
about  to  sweep  over  the  entire  country.  Some 
important  States,  as,  for  instance,  Ohio  and  Mis- 
souri, promptly  enacted  similar  laws.  Several 
business  assessment  associations  exhibited  a 
marked  desire  to  get  the  benefit  of  the  certifi- 
cates of  the  department,  provided  by  this  stat- 
ute. When  the  laws  of  the  State  of  the  company's 
domicile  made  no  provisions  for  companies  of 
this  kind,  the  association  would  undertake  to 
qualify  as  a  stipulated  premium  company  by 
applying  for  admission  to  New  York  or  one  of 
the  other  States  as  such,  and  by  complying  with 
the  reserve  requirements.  Rather  inconsistent- 
ly the  New  York  department  refused  to  consent 
to  this  and  its  ruling  was  followed  in  the  other 
States  for  the  most  part. 


ASSESSMENT  REORGANISATION   305 

In  this  connection  an  interesting  incident  may 
be  related  which  will  shed  much  light  upon  the 
evils  of  this  condition.  A  certain  large  western 
association  which  was  then  flourishing  and 
which  might  easily  have  been  preserved,  had  its 
managers  not  been  misled  into  accepting  instead 
of  real  adequacy  the  pseudo-adequacy  provided 
by  these  laws,  first  applied  for  admission  to  one 
of  these  States  in  order  to  get  the  benefit  of  the 
certificate.  Upon  this  being  refused,  the  man- 
agers applied  to  a  consulting  actuary  who,  with- 
out telling  an  untruth,  could  have  certified  that 
the  association  could  comply  with  the  require- 
ments of  the  New  York  law  as  to  the  reserve  for 
stipulated  premium  companies,  according  to  the 
Actuaries'  Table  and  4  per  cent,  interest,  and 
would  still  possess  a  surplus  of  many  thousand 
dollars.  The  certificate  was  refused,  it  being 
manifest  that  the  sole  use  that  could  be  made  of 
it  would  be  to  create  the  impression  that  the 
rates  and  reserves  were  adequate.  Blinded, 
however,  by  the  false  impression  caused  by  the 
adoption  of  these  laws,  the  management  per- 
sisted in  its  course  until  ruin  overtook  the  asso- 
ciation. 

And  in  some  other  cases  many  of  the  evils 
which  might  have  followed  the  adoption  of  these 
laws  were  prevented  by  the  prompt  exposure  of 
their  defects  by  the  independent  insurance  press 
of  the  country,  which  criticised  them  unsparing- 


S06  BUSINESS  OF  LIFE  INSURANCE 

ly,  and,  by  apprising  tlie  agents  of  the  regular 
companies  throughout  the  country  of  the  facts 
concerning  the  form  of  valuation  prescribed  by 
the  law,  prevented  this  unwarranted  certificate 
of  solvency  from  being  as  effectual  as  was  antici- 
pated. 

In  consequence,  the  only  association  that  re- 
organised under  this  law  in  the  State  of  New 
York  soon  changed  its  status  again  by  taking 
advantage  of  the  privilege  of  passing  over  into 
a  level  premium  company.  No  new  company 
has  ever  been  organised  under  the  stipulated 
premium  law  in  New  York,  and  it  stands  to-day 
a  dead  letter  upon  the  statute  books  and  a  monu- 
ment of  the  folly  of  the  managers  of  the  associa- 
tion which  caused  it  to  be  introduced  and  of  the 
shame  of  the  department  which  weakly  consent- 
ed to  it  and  approved  it. 

Had  the  stipulated  premium  law  not  failed  of 
its  purpose,  the  assessment  associations,  by  re- 
organising under  it,  could  and  would  have  con- 
tinued the  is^suance  of  policies  for  the  whole  pe- 
riod of  life  at  inadequate  rates  of  premium  and 
with  the  pretence  that  the  payment  of  the  poli- 
cies was  secured  by  adequate  reserves.  This 
disgrace  was  narrowly  averted.  Nearly  all  the 
departments,  however,  exhibiting  a  praisewor- 
thy desire  to  assist  the  assessment  associations 
to  get  on  a  sound  basis,  were  guilty  of  laxity  in 
their  rulings  to  enable  them  to  pass  over  into 


ASSESSMENT  REORGANISATION   307 

regular  life  insurance  companies,  in  tEe  follow- 
ing regard,  viz. :  While  they  did  not  permit  the 
association  to  issue  new  policies,  after  qualify- 
ing as  regular  life  insurance  companies,  without 
putting  up  sufficient  reserves  thereon,  they  con- 
sented to  treat  the  old  assessment  policies  as 
renewable  one-year  term  policies  for  valuation 
purposes.  The  theory  upon  which  this  was  done 
was  that,  while  the  individual  policies  were  not, 
in  fact,  one-year  term  policies  with  increasing 
premiums,  they  were  current  cost  policies  in  the 
aggregate,  with  provision  that  sufficient  money 
must  be  collected  currently  from  the  insured 
under  this  class  of  policies  to  pay  the  aggregate 
losses.  By  the  legal  contract  it  is  true  that  no 
reserve  is  required,  excepting  sufficient  to  pay 
losses  up  to  the  time  the  next  premium  fell  due, 
but  it  is  also  true  that  to  permit  these  policies 
thus  to  be  classified  as  legal  reserve  policies  was 
fundamentally  an  error,  and  their  valuation  on 
this  basis  was  an  endorsement  of  the  proposition 
that  a  system  of  this  sort  could  be  operated  in- 
definitely, and  that  the  last  claims  to  fall  due 
under  such  policies  actually  could  and  would  be 
paid.  It  would  have  been  possible,  in  fact,  to 
have  valued  the  policies  on  the  basis  that  the 
stipulated  premiums  named  in  the  policy  con- 
tracts were  what  was  to  be  collected.  Had  the 
commissioners  taken  this  view  instead  of  the 
other,  they  would  have  compelled  these  compa^ 


308  BUSINESS  OF  LIFE  INSUEANCE 

nies  to  make  an  immediate  readjustment  of  their 
business  as  a  condition  to  being  admitted  as 
regular  companies. 

This  attitude  taken  by  the  insurance  commis- 
sioners was  for  the  purpose  of  enabling  the  as- 
sessment associations  which  reorganised  in  this 
manner  to  readjust  their  old  business  more  at 
leisure.  It  was  the  idea  that  they  would  thus 
work  off  their  old  business  by  means  of  surren- 
ders, lapses  and  deaths,  and  particularly  by 
means  of  rewriting  it  upon  sound  plans.  Their 
position  was  not  reprehensible  under  the  circum- 
stances, although  its  wisdom  may  be  doubtful. 

A  very  serious  and  unfortunate  blunder,  how- 
ever, was  generally  made  by  the  insurance  de- 
partments in  permitting  the  transfer  of  associa- 
tions into  the  ranks  of  regular  life  insurance 
companies,  in  that  with  few  exceptions  they  fail- 
ed to  charge  against  them  as  a  special  reserve 
liability  the  reserves  for  which  they  were  liable 
according  to  the  terms  of  their  contracts.  By 
this  is  meant  not  reserves  which  would  be  neces- 
sary to  carry  out  the  contracts,  but  reserves 
which  they  had  specifically  promised  in  the  poli- 
cies that  they  would  set  aside  and  accumulate. 
In  many  cases  the  policies  or  the  constitution  or 
by-laws  bound  the  association  to  set  aside  a  cer- 
tain portion  of  the  premiums  received,  as  a  trust 
fund  under  conditions  clearly  specified,  which 
fund  could  properly  be  drawn  upon  only  to  meet 


ASSESSMENT  REORGANISATION   309 

death  losses,  and  for  that  purpose  only  when  the 
conditions  specified  were  fulfilled.  Manifestly, 
this  fund  constituted  a  liability.  The  setting  up 
of  a  standard  for  measuring  the  liabilities  of  life 
insurance  companies  under  their  ordinary  con- 
tract obligations  does  not  excuse  an  insurance 
commissioner  for  failing  to  charge  against  the 
company  or  association  any  further  liability 
which  it  may  have  incurred  by  reason  of  its  own 
express  promise.  Notwithstanding  which,  almost 
without  exception,  the  commissioners  by  their 
laxity  in  this  regard  virtually  authorised  the 
associations  to  use  these  trust  funds  for  their 
own  purposes,  treating  the  same  as  general  sur- 
plus, whereas  in  all  cases  the  laws  in  force  when 
the  same  were  created,  as  well  as  the  conditions 
of  the  contract  itself,  strictly  provided  that  these 
funds  could  not  be  used  for  expenses.  The  com- 
missioners of  other  States  than  that  of  the  com- 
pany's domicile,  accepting  the  certificate  of  val- 
uation by  the  commissioners  of  the  home  State, 
also  set  their  seal  of  approval  upon  this  conduct, 
sometimes  with  knowledge  and  sometimes  un- 
consciously. 

The  legislature  of  one  State,  Massachusetts, 
enacted  a  special  law,  requiring  all  the  existing 
business  assessment  associations  then  doing 
business  in  the  State,  whether  domiciled  there 
or  not,  to  cease  issuing  assessment  policies,  and 
authorising  them  to  begin  issuing  level  premium 


310  BUSINESS  OF  LIFE  INSURANCE 

policies.  This  act  provided  definitely  for  the 
valuation  of  the  assessment  insurance  as  renew- 
able policies  of  one-year  term  insurance  except 
when  the  same  were  limited  payment  policies, 
which  are  valued  as  the  same  forms  of  policies 
in  legal  reserve  companies.  The  Massachusetts 
law  also  provided  that  these  reorganised  assess- 
ment companies  should  have  the  privilege  for  a 
limited  time,  originally  five  years  and  afterward 
extended  to  eight  years,  of  having  their  policies 
valued  as  term  insurance  the  first  year,  followed 
by  a  level  premium  insurance,  beginning  at  the 
end  of  that  year  and  at  an  age  one  year  higher. 
This  privilege  is  not  granted  in  that  State  to  any 
other  companies. 

The  wisest  managers  of  the  assessment  asso- 
ciations which  changed  into  legal  reserve  com- 
panies proceeded  more  or  less  promptly  to  ex- 
change for  their  outstanding  assessment  poli- 
cies, policies  upon  the  usual  level  premium  plans 
by  means  of  solicitation  by  agents.  The  new 
policies  were  sometimes  placed  at  the  rates  for 
the  full  attained  ages  of  the  insured,  some  allow- 
ance being  made  for  the  accumulation  of  sur- 
plus, if  any,  upon  the  original  policy.  As  a 
means  of  encouraging  this  transfer,  sometimes 
the  rates  of  premium  offered  in  making  these 
exchanges  contained  a  materially  smaller  ex- 
pense charge  than  was  ordinarily  the  case. 

In  many  instances,  however,  the  policyholder 


ASSESSMENT  REORGANISATION   311 

was  offered  a  level  premium  policy  with  a  rate 
as  of  his  age  at  entry.  This  could  be  done,  of 
course,  only  provided  there  was  paid  in  cash  or 
charged  against  the  policy  the  reserve  required 
to  be  in  hand  at  the  date  of  change.  If  charged, 
interest  would  require  to  be  paid  upon  the  lien. 
In  some  cases  the  companies  consented  that  this 
should  itself  be  charged,  instead  of  being  paid 
annually  in  cash,  the  intention  being  to  com- 
pound the  same.  The  wisdom  of  this  is  doubtful 
under  all  circumstances.  In  many  cases  the  ac- 
cumulation would  soon  amount  to  more  than  the 
reserve,  and,  consequently,  the  plan  is  really  im- 
practicable. There  is  also  doubt  as  to  its  legal- 
ity. 

To  this  system  of  dating  back  the  new  policy 
and  giving  the  rate  for  the  age  at  entry,  when 
fairly  carried  out,  there  could  be  no  ob.iection. 
In  practice,  however,  it  frequently  occurred  that 
the  insured  was  not  fully  advised  that  such  a 
charge  was  to  be  made,  and  this  is  particularly 
likely  to  be  true  when  the  interest  is  to  be  com- 
pounded instead  of  paid.  Often  the  first  inkling 
of  the  true  situation  that  anybody  interested  in 
the  policy  received  was  when  the  insured  died 
and  the  beneficiary  had  a  much  smaller  amount 
than  the  face  of  the  policy  offered  to  her.  When 
correctly  and  truthfully  represented  to  the  in- 
sured, this  plan  caused  him  to  be  placed  in  ex- 
actly the  same  position  as  if  he  had  originally 


312  BUSINESS  OF  LIFE  INSURANCE 

taken  a  level  premium  policy,  and,  after  the 
lapse  of  a  period  equal  to  that  of  his  member- 
ship, had  borrowed  back  the  reserve. 

A  western  company,  under  the  advice,  it  is 
said,  of  the  actuary  of  the  department  of  its 
home  State  and  certainly  without  any  interfer- 
ence on  the  part  of  the  department,  made  use  of 
a  device  of  this  nature  which  was  much  less 
excusable.  Before  it  reorganised  into  a  regular 
legal  reserve  company  this  association,  which 
had  charged  a  stipulated  premium  considerably 
in  excess  of  the  current  cost  of  the  insurance, 
held  a  large  amount  of  funds  under  trust  agree- 
ments with  the  policyholders  according  to  their 
contracts  and  its  own  constitution  and  by-laws. 
Agents  were  sent  out  to  induce  these  policy- 
holders to  change  over  to  a  legal  reserve  plan  on 
the  following  basis,  to-wit : 

A  twenty-payment  policy  was  offered,  dated 
back  to  the  original  date  of  entry  and  age  at 
entry.  Against  this  was  charged  a  lien,  not 
merely  for  the  reserve  required,  but  for  a  large 
amount  in  excess  of  the  reserve.  An  addition,  to 
pay  for  a  temporary  insurance  for  the  remain- 
ing years  of  the  limited  payment  period,  was 
made  to  the  premium  for  the  policy,  so  that  in 
case  of  death  during  that  period  the  lien  would 
be  cancelled  and  the  full  face  of  the  policy  would 
be  payable.  The  lien  also  was  to  accumulate  at 
compound  interest.  All  of  this  care  to  prevent 


ASSESSMENT  REORGANISATION   313 

the  insured  from  realising  that  there  was  a 
charge  against  his  policy  was  tantamount  to  an 
instruction  to  the  agent  to  leave  him  as  much  in 
the  dark  as  possible.  The  existing  funds  in  the 
hands  of  the  company  belonging  to  the  policy 
were  not  distributed  to  it  either  in  reduction  of 
payment  of  premium  or  otherwise,  but  a  large 
surplus  was  estimated  to  accumulate  by  the  end 
of  the  period,  equalling  or  exceeding  the  largest 
surplus  returns  on  similar  policies  in  the  leading 
companies  of  the  country,  which  policies  had 
actually  been  kept  in  force  for  the  full  period  of 
twenty  years,  although  these  policies  might  now 
only  have  half  that  time  to  run  or  thereabout. 

It  might  be  that  the  members  were  in  some 
cases  advised  that  the  commuted  back  premiums 
which  were  charged  as  a  lien  would  be  deducted 
from  the  surplus  when  settlement  was  made,  but 
there  is  reason  to  think  that  even  this  was  not 
always  explained  with  care.  And  they  were  not 
advised  usually  what  would  happen  if  the  sur- 
plus was  not  enough  to  cover  the  debt. 

The  effect  of  this  scheme  was  to  release  to  the 
company  presumably  the  policyholder's  interest 
in  the  accumulated  funds  and  at  the  same  time 
to  charge  his  policy  with  more  than  the  reserve 
at  the  time,  thus  enabling  the  company  to  put 
this  lien  instead  of  the  increase  of  reserve  for 
two  or  three  years  thereafter  and  to  appropri- 
ate the  premiums  received  to  expense  and  cur- 


314  BUSINESS  OF  LIFE  INSURANCE 

rent  mortuary  purposes.  This  outrageous  pro- 
ceeding was  exposed  in  the  insurance  press  and 
most  other  companies  have  been  careful  not  to 
imitate  it  too  closely.  It  has  never  been  rebuked 
officially,  however,  to  this  day  by  any  commis- 
sioner, and  under  its  operation  the  company  in 
question  and  some  others  have  managed,  despite 
the  payment  of  an  extravagant  amount  for  ex- 
penses, to  hold  an  apparently  handsome  surplus, 
which  in  fact  ought  long  ago  to  have  been  re- 
garded a  sacred  reserve. 

Some  business  assessment  associations  have 
by  resolution  of  the  members,  voting  in  person 
or  by  proxy,  or  by  resolution  of  the  board  of 
directors,  changed  all  their  policies  into  whole 
life  level  premium  policies,  charging  them  with 
liens  for  the  amount  of  the  reserve.  Since  the 
companies  were  mutual  and  the  contract  was 
between  one  member  and  his  fellow  members, 
this  was  regarded  lawful. 

In  one  case  at  least  the  legislature  passed  a 
law  requiring  such  a  change  and  directly  stipu- 
lating that  the  reserve  should  be  charged.  This 
law  made  no  provision  for  the  application  of 
any  funds  already  credited  to  the  policies,  in  re- 
duction of  the  charge  or  otherwise.  It  was  in- 
terpreted to  warrant  the  transfer  of  the  funds 
on  hand  to  the  general  surplus,  and  to  authorise 
their  use  for  purposes  other  than  those  named  in 
the  original  agreements,   The  law  providers  for 


ASSESSMENT  REORGANISATION   315 

a  notice  to  the  members  affected,  but  a  state- 
ment of  what  had  been  done,  which  must  have 
confused,  more  than  enlightened,  and  not  a  plain 
statement  of  precisely  what  the  beneficiary- 
would  receive,  was  sent  to  the  members.  In  con- 
sequence most  frequently  the  first  actual  notice 
of  the  lien  which  anybody  interested  in  the  pol- 
icy received  was  when  death  took  place  and  a 
claim  was  made. 

The  device  of  reinsuring  the  concern  in  an- 
other association  or  company  has  also  been 
made  use  of.  In  such  cases,  usually  liens  for  at 
least  the  amounts  of  the  reserves  have  been 
charged  by  the  contract  of  reinsurance.  And 
often  all  the  actual  assets  were  transferred  un- 
lawfully to  the  retiring  managers  as  a  commis- 
sion. The  results  have  not  been  so  good,  on  the 
whole,  as  in  cases  of  reorganisation  of  the  asso- 
ciation without  losing  its  identity. 

The  foregoing  is  a  brief  statement  of  the  vari- 
ous modes  of  reorganisation  and  readjustment 
which  have  been  adopted  by  business  assess- 
ment associations.  Some  of  them  have  been 
measurably  successful  and  the  companies  are 
already  upon  a  sound  basis,  with  all  their  old 
business  readjusted,  though  suffering  somewhat 
as  a  result  of  the  dissatisfaction  of  members 
with  the  change.  Some  of  the  plans  employed 
involved  great  and  unnecessary  hardship  for 
the  members  and  opened  the  door  for  abuses 


316  BUSINESS  OF  LIFE  INSURANCE 

wliich  ought  to  have  been  guarded  against. 
Aside  from  the  occasional  features  of  conceal- 
ment and  malversation,  there  is  not  very  much 
to  criticise.  The  conditions  were  hard  and  called 
for  severe  remedies. 


CHAPTER   XXX 

THE  BEADJUSTMENT  OF  RATES  IN  FRATERNAL  INSUR- 
ANCE ORDERS 

The  necessity  for  the  abandonment  of  their 
assessment  plans  of  operation  was  not  borne  in 
upon  the  fraternal  beneficiary  societies  until 
some  time  after  the  same  lesson  had  been  learned 
by  the  business  assessment  associations.  This 
was  due  in  large  part  to  their  much  more  rapid 
and  persistent  growth  and  to  the  sentiment  of 
fraternity  which  bound  their  members  together, 
but  the  principal  cause  was  the  low  expense  rate 
at  which  their  affairs  were  conducted.  This  fea- 
ture caused  the  pressure  upon  the  younger  mem- 
bers, in  the  form  of  a  higher  price  for  the  pro- 
tection than  the  fair  cost  of  the  same,  to  be  ma- 
terially postponed,  for  a  large  part  of  what  was 
saved  in  the  expense  cost  could,  of  course,  be 
offset  by  increased  mortality  cost,  due  to  the 
faults  of  the  plan,  before  comparison  with  insur- 
ance in  other  institutions  would  show  that  the 
member  was  being  materially  discriminated 
against. 

817 


318  BUSINESS  OF  LIFE  INSURANCE  . 

In  several  of  the  societies,  some  of  which  have 
readjusted  their  rates  successfully  and  are  now 
upon  an  adequate  rate  basis,  readjustment  was 
deferred,  in  point  of  fact,  until  the  members  re- 
cently admitted  were  paying  currently  as  much 
net  for  their  insurance,  to  protect  which  no  re- 
serve was  being  put  up,  as  was  necessary  to 
carry  level  rate  old  line  insurance  with  adequate 
reserves.  In  other  words,  that  portion  of  their 
contributions  which  should  have  been  set  aside 
in  order  to  maintain  their  rates  of  premium 
level  throughout  life  was  being  withdrawn  cur- 
rently in  order  to  cover  the  deficiencies  in  the 
payments  of  the  older  members.  This  was,  how- 
ever, about  as  far  as  the  delay  could  be  carried, 
under  any  circumstances,  and  in  more  than  one 
society  it  would  not  have  been  possible  to  delay 
so  long. 

Before  the  need  for  a  radical  change  of  plan 
was  apprehended  by  the  managers  of  the  frater- 
nities one  of  the  larger  of  them  had  already  been 
compelled  to  dissolve  in  consequence  of  a  tem- 
porising policy  which  resulted  in  changes  that 
were  not  a  material  improvement  over  the  old 
plans,  and  another  of  the  older  and  larger  so- 
cieties had  drifted  so  far  toward  disaster  that 
it  was  not  possible  to  rescue  it,  and  all  that 
could  be  done  was  to  watch  its  slow  but  sure 
progress  toward  dissolution,  which,  though  de- 
ferred, came  at  last  within  the  past  year. 


FRATERNAL  READJUSTMENT     319 

The  failui'e  of  the  first-mentioned  society  and 
the  irretrievable  condition  of  the  second  were 
not  lost  upon  the  officers  and  representatives  of 
the  other  orders,  nor  were  the  results  of  the  re- 
organisations and  attempts  at  reorganisation  of 
the  business  assessment  associations.  In  conse- 
quence, when  the  fraternal  societies  were  reluc- 
tantly making  ready  for  changes,  they  had  be- 
fore them  many  examples  indicating  what  to 
choose  and  what  to  avoid. 

Fortunately,  also,  at  the  very  outset  one  so- 
ciety attempted  to  relieve  itself  by  reducing  the 
amount  of  benefit  payable  in  event  of  death. 
This  reduction  did  not  take  the  form  of  a  lien 
charged  against  the  certificate  for  the  amount 
of  the  reserve,  but  was  a  definite  reduction  of 
the  amount  payable.  The  purpose,  however,  was 
substantially  the  same  as  when  a  lien  is  charged, 
viz.,  to  relieve  the  society  from  a  part  of  its  obli- 
gation in  order  to  enable  it  to  fulfill  the  remain- 
der. At  the  same  time  it  was  perhaps  not  so 
defensible,  nor  the  reason  for  it  so  comprehensi- 
ble. The  right  to  reduce  the  amount  of  the  bene- 
fit was  contested  and  the  Court  of  Appeals  of  an 
important  State  decided  that  fraternal  benefic- 
iary societies  have  no  power  to  reduce  the  bene- 
fit payable  upon  the  death  of  a  member  below 
the  amount  stipulated  in  his  certificate  and  in 
the  laws  of  the  society  at  the  time  the  certificate 
was  issued.    It  should  be  explained,  however, 


320  BUSINESS  OF  LIFE  INSURANCE 

that  this  does  not  mean  that  a  society  must 
necessarily  pay  its  certificate  in  full  for  the  max- 
imum amount.  On  the  other  hand,  in  case  its 
constitution  and  by-laws  provide  that  the  pro- 
ceeds of  one  assessment  only  is  to  be  paid,  but 
not  exceeding  the  maximum  amount,  of  course 
this  provision  governs,  although  the  proceeds  of 
one  assessment  may  be  much  less  than  the  maxi- 
mum sum. 

It  is  by  no  means  certain,  of  course,  that  this 
decision  would  be  held  to  apply  to  the  charging 
of  a  lien  for  the  reserve,  even  though  that  were 
done  without  the  express  consent  of  the  member 
and  by  the  action  of  the  representative  body ;  but 
the  fact  that  its  application  is  doubtful,  and  the 
further  fact  that  this  method  has  caused  much 
dissatisfaction  when  employed  by  business  as- 
sessment associations,  combined  to  deter  the  fra- 
ternal societies  from  attempting  it,  although  it 
is  a  device  which  offers  the  distinct  advantage, 
according  to  the  opinions  of  men  who  would  call 
themselves  prudent,  that  it  does  not  apprise  the 
members  so  bluntly  and,  therefore,  offensively 
of  the  fact  that  there  is  a  serious  change  in  their 
payments  and  benefits,  as  does  a  sharp  increase 
in  the  payments  required.  Perhaps  in  fraternal 
societies  where,  before  a  reform  can  be  insti- 
tuted, it  must  be  discussed  by  representatives  of 
local  bodies,  this  argument  did  not  seem  to  have 
the  urgency  and  cogency  as  in  business  assess- 


FEATERNAL  READJUSTMENT  321 

ment  associations,  where  agitation  could  per- 
haps be  wholly  avoided  by  employing  some 
scheme  which  did  not  alter  the  payment  to  be 
made  by  the  member,  although  it  might  not  be  so 
sound  or  so  satisfactory  as  one  which  would 
have  advised  all  members  precisely  what  was 
the  nature  of  the  change. 

At  first  the  tendency  of  the  fraternal  societies 
in  changing  their  plans  was  to  stick  to  their  pro- 
gramme of  furnishing  current  cost  protection. 
In  other  words,  they  were  indisposed  to  change 
to  level  premium  plans  for  two  reasons:  first, 
they  had  from  the  beginning  decried  the  level 
premium  plan,  which  was  known  among  them  by 
the  hated  name  of  ' '  old  line ' ' ;  and,  second,  they 
had  preached  both  that  a  mathematical  reserve 
is  unnecessary,  and  also  that  fraternal  societies 
could  not  safely  accumulate  one,  which  would 
mean  the  downfall  of  the  fraternal  system. 
Therefore,  the  first  readjustments  were  made 
on  lines  which  called  for  the  accumulation  of  but 
a  small  reserve  or  none  at  all,  and  the  furnish- 
ing of  protection  on  some  current  cost  basis 
more  nearly  consonant  with  sound  principles 
than  the  former  plans.  Thus  some  of  them 
caused  to  be  introduced  step-rate  plans — that  is, 
term  insurance  with  the  rate  advancing  either 
every  year  or  every  five  years.  In  most-  cases 
these  societies  did  not  make  any  provision  either 
for  continuing  the  advance  throughout  life  or 


322  BUSINESS  OF  LIFE  INSURANCE 

for  maintaining  a  fixed  premium  after  a  certain 
age.  In  some  cases,  however,  they  did  make 
such  a  provision  by  means  of  the  collection  of  a 
small  reserve  contribution  with  the  premiums 
collected  prior  to  attaining  that  age.  Three  sys- 
tems of  this  nature  have  been  adopted  as  fol- 
lows: 

First,  a  system  by  which  the  increasing  rate 
prior  to  the  age  at  which  the  rate  is  to  become 
fixed,  is  the  same  without  regard  to  the  age  at 
entry;  that  is  to  say,  the  reserve  contribution, 
as  well  as  the  premium  for  the  current  risk,  ad- 
vances each  year.  Under  this  system,  which  may 
be  rigidly  scientific,  if  properly  computed,  of 
course  the  amount  of  reduction  of  the  rate  to  be 
charged  after  attaining  the  age  named,  will  dif- 
fer according  as  one  was  admitted  at  one  age  or 
another,  because  the  amount  of  reserve  accumu- 
lated will  differ. 

Second,  a  system  under  which,  likewise,  the 
reserve  contribution  increases  as  does  the  pre- 
mium to  cover  the  current  risk,  but  under  which, 
notwithstanding,  it  is  attempted  to  give  the  same 
rate  to  all  the  members  after  reaching  the  age 
designated  without  regard  to  their  contributions 
to  the  reserve;  thus,  in  effect,  for  instance,  re- 
quiring the  member  who  contributes  from  age 
20  to  age  45  and  after  age  45  contributes  as 
much  as  a  member  admitted  at  45,  to  be  satisfied 
with  the  same  rate  from,  say,  age  60  as  the  mem- 


FRATERNAL  READJUSTMENT     323 

ber  admitted  at  45,  although  the  value  of  his  con- 
tributions to  the  reserve  may  be  two  or  three 
times  as  much.  The  unfairness  of  this  system  is 
manifest,  and  that  unfairness  also  implies  un- 
soundness. It  puts  upon  persons  admitted  at 
the  younger  ages  a  burden  as  compared  with 
persons  admitted  at  older  ages,  which  will  be 
borne  only  so  long  as  the  facts  are  not  clearly 
discerned  by  them,  and,  therefore,  the  appli- 
cants for  membership  are  unable  to  discriminate 
and  exercise  selection  in  the  matter.  In  the 
course  of  time,  however,  this  selection  will  come 
into  operation  and  the  scheme  must  necessarily 
fail,  only  persons  at  the  higher  ages  seeking  ad- 
mission and  younger  members  withdrawing.  It 
can  be  made  fair  only  by  collecting  no  reserve 
contribution  up  to  the  highest  age  of  admission, 
so  that  from  that  point  all  the  members  will 
begin  their  contributions  to  reserve. 

Third,  a  system  under  which  a  level  contribu- 
tion to  reserve,  fixed  according  to  age  at  entry, 
is  superimposed  upon  an  increasing  premium 
to  cover  the  current  risk,  this  level  contribution 
to  reserve  being  so  computed  for  age  at  entry 
as  to  produce  the  same  amount  at,  for  instance, 
age  60,  and,  therefore,  to  reduce  the  net  level 
premium  which  would  otherwise  be  required 
from  age  60  throughout  life  by  the  same  amount 
without  regard  to  the  age  of  the  member  upon 
admission.     Theoretically,  this  plan  is  sound, 


324  BUSINESS  OF  LIFE  INSURANCE 

and  practically  it  can  be  operated,  though  not 
without  diflSculties.  The  chief  embarrassment 
will  be  found  in  the  application  of  a  system  of 
adjusting  the  collections  to  the  actual  cost,  as 
by  passing  assessments  when  the  funds  on  hand 
enable  the  society  to  do  so.  This  may  be  over- 
come, however,  by  care  in  keeping  the  accounts, 
and  also  particularly  in  drawing  the  by-laws 
under  which  the  scheme  is  operated. 

Under  these  plans  it  will  be  observed,  how- 
ever, the  society  must  accumulate  reserves,  and 
as  compared  with  the  level  premium  plan,  the 
distinction  is  one  of  degree  and  not  one  of  prin- 
ciple. It  should  be  noted  also  that  in  order  that 
even  the  most  scientific  plan  of  this  nature  may 
work  satisfactorily  it  is  necessary  that  the  trust 
character  of  the  reserves  accumulated  should  be 
recognised,  and  that  in  particular  under  no  cir- 
cumstances should  the  reserves  for  the  purpose 
of  maintaining  premiums  level  beyond,  say,  age 
60  be  drawn  upon  in  order  to  meet  death  losses 
at  other  ages.  In  other  words,  frequent  valua- 
tions to  determine  the  reserve  required  are  nec- 
essary or  the  contributions  to  reserve  must  be 
religiously  set  aside  for  that  purpose,  or  both. 

The  experiment  of  readjusting  by  offering  a 
level  premium  estimated  to  be  sufficient  on  the 
basis  of  certain  lapse  expectations  has  also  been 
made  in  fraternal  life  insurance  on  a  large  scale. 
The  society  which  first  undertook  this  and  which 


FRATERNAL  READJUSTMENT     325 

is  still  its  most  important  exemplar,  is  distin- 
gnished  also  because  of  the  fact  that  it  is  the 
first  fraternal  insurance  order  to  collect  funds 
to  a  large  amount.  Its  initiative  in  this  regard, 
followed  by  a  successful  experience  both  in  the 
field  and  in  holding  its  members,  undoubtedly 
had  a  great  deal  of  influence  in  causing  the  re- 
moval of  the  objections  to  the  accumulation  of  a 
reserve,  which  were  so  deep-seated  in  the  minds 
of  the  officers  and  the  representatives  in  frater- 
nal societies.  At  the  same  time  it  cannot  be  said 
that  this  society  has  demonstrated  the  success 
of  its  plan.  There  have  been  two  valuations,  as 
required  by  the  laws  of  Great  Britain,  in  which 
country  it  is  also  operating,  and  these  show  that 
as  compared  with  the  reserves  required  on  the 
ordinary  basis,  there  is  a  very  large  deficiency. 
The  same  actuary  certifies  that  upon  certain 
assumptions  as  to  lapsation,  which  on  the  face 
of  his  statement  do  not  appear  to  be  reasonable, 
the  reserves  brought  out  are  less  than  the  accu- 
mulated funds;  but  until  there  is  a  demonstra- 
tion that  the  experience  of  the  society  is  within 
the  assumptions  made  in  computing  such  re- 
serves and  that  the  ratios  employed  are  unques- 
tionably reliable,  judgment  must  necessarily  be 
suspended  as  to  whether  the  plan  is  succeeding 
or  not. 

In  more  recent  years  there  has  been  a  strong 
tendency  in  the  readjustment  of  the  rates  of 


326  BUSINESS  OF  LIFE  INSURANCE 

these  societies  toward  the  introduction  of  a  level 
premium  plan.  This  was  to  have  been  expected, 
and  is  in  accordance  with  the  experience  in 
Great  Britain  likewise,  where  reorganisation  of 
the  friendly  societies  was  effected  in  almost 
every  case  upon  the  basis  of  level  rates  of  pre- 
mium. With  very  rare  exceptions,  also,  the  so- 
cieties have  not  attempted  to  take  into  account 
the  possible  influence  of  lapses  or  discontinu- 
ances in  computing  their  new  rates  of  premium, 
and  in  the  few  cases  in  which  they  have  taken 
this  into  account  they  have  done  so  in  a  hap- 
hazard manner,  so  that  their  computations  and 
the  rates  which  they  have  made  cannot  be  re- 
garded in  any  sense  as  demonstrated  to  be  ade- 
quate. Several  of  them,  however,  have  adopted 
rates  which,  according  to  their  mortality  experi- 
ence, may  be  relied  upon  as  sufficient. 

In  most  of  the  recent  readjustments  the  rates 
have  been  put  into  effect  at  the  full  attained 
ages  of  the  members,  with  the  exceptions  noted 
hereinafter.  In  some  of  the  organisations  men- 
tioned, however,  they  have  been  put  into  effect 
as  of  the  ages  at  entry,  and  then  no  provision,  or 
an  obviously  insufficient  provision,  was  made  to 
cover  the  missing  reserves  which  would  have 
accumulated,  had  the  insurance  actually  been  in 
force  at  level  premiums  from  the  age  at  entry. 
This  is,  perhaps,  one  of  the  most  reprehensible 
departures  from  correct  principles  that  has  put 


FRATERNAL  READJUSTMENT  327 

in  an  appearance  in  these  readjustments,  be- 
Ijt'ause  it  gives  a  semblance  of  soundness  in  the 
suflBciency  of  premiums  demanded  for  new  en- 
trants, while,  in  point  of  fact,  it  leaves  the  in- 
stitution insolvent  until  another  readjustment 
is  made.  Of  course,  it  is  not  possible  that  a  fra- 
ternal society  when  it  finds  it  necessary  to  re- 
adjust its  rates,  should  have  on  hand  out  of  the 
past  contributions  of  its  members  a  sufficient 
amount  to  make  good  its  reserves,  on  the  basis 
of  giving  them  all  the  rates  at  ages  of  entry.  If 
it  had  on  hand  this  reserve,  it  would  be  because 
the  rates  in  the  past  have  been  sufficient,  and, 
therefore,  no  readjustment  would  be  required. 
In  other  words,  that  a  readjustment  is  necessary 
indicates  that  this  reserve  is  not  on  hand. 

The  exigencies  of  the  situation,  however,  usu- 
ally call  for  some  concession  to  members  in  vari- 
ous advanced  ages,  in  consequence  of  which 
such  a  man  is  usually  given  the  rate,  not  at  his 
full  attained  age,  but  at  some  age  under  that  of 
his  full  attained  age.  In  one  of  the  societies 
which  readjusted  its  rates,  it  was  found  that  the 
funds  on  hand  would  cover  the  reserves  on  the 
policies  of  members  at  attained  ages  beyond  70, 
if  they  were  all  given  the  rate  for  the  age  of  70 ; 
this  was  done  accordingly.  In  some  other  socie- 
ties which  have  readjusted,  advantage  was  taken 
of  the  fact  that  the  mortality  at  the  younger 
ages  was  consider^blj^  under  that  exhibited  by 


328  BUSINESS  OF  LIFE  INSURANCE 

the  standard  tables,  and  in  consequence  some 
part  or  all  of  this  advantage  was  drawn  upon  in 
the  form  of  a  fraternal  assessment  or  a  guar-r 
antee  fund  assessment  upon  the  younger  mem- 
bers only,  to  make  good  the  deficiency  in  re- 
serves upon  the  older  members,  who  were  there- 
by given  rates  at  age  65,  age  60,  or  even  in  one 
instance  age  55.  The  complete  success  of  these 
methods  of  meeting  the  conditions  is  not  yet 
demonstrated ;  but  sufficient  is  known  to  warrant 
the  statement  that  the  chief  menace  to  their  suc- 
cess has  been  the  dissatisfaction  of  the  older 
members,  notwithstanding  these  liberal  provi- 
sions for  their  relief,  which  has  had  a  much  more 
marked  influence  upon  the  younger  members  in 
causing  them  to  discontinue,  than  any  dissatis- 
faction with  the  rates  of  premium  required  to 
be  paid  by  them. 

A  very  important  question  in  connection  with 
the  readjustment  of  rates  in  these  societies  has 
to  do  with  the  mortality  table  to  be  employed. 
At  first  blush  this  seems  to  the  tyro  in  actuarial 
science  a  very  simple  matter.  He  has  at  hand 
standard  tables  which  are  used  by  the  State  de- 
partments in  computing  the  reserves  of  legal 
reserve  companies,  and  are  also  used  by  the  com- 
panies themselves  in  computing  their  rates  of 
premiums,  surrender  values,  etc.  If  the  argu- 
ment is  presented  that  these  tables  are  redun- 
dant at  the  younger  ages,  i,  e.,  that  they  repre- 


FRATERNAL  READJUSTMENT  329 

sent  a  higher  mortality  experience  than  a  thor- 
oughly well-conducted  society,  operating  among 
persons  not  subject  to  extra  hazards  because  of 
occupations  or  otherwise,  may  fairly  expect  to 
experience,  which  is  true,  the  same  tyro  will, 
doubtless,  turn  to  the  National  Fraternal  Con- 
gress Table  of  mortality,  which  was  deduced 
from  the  experience  of  two  or  three  of  the  so- 
cieties and  has  been  repeatedly  endorsed  by  the 
National  Fraternal  Congress  and  is  its  mini- 
mum standard  for  adequate  rates  in  new  fra- 
ternal societies. 

There  will  be  found  to  be  many  objections  to 
either  of  these  courses.  In  the  first  place,  owing 
to  the  classes  of  persons  admitted,  their  occupa- 
tions, habits,  race  and  other  characteristics,  the 
mortality  in  each  society  is  more  or  less  distinc- 
tive. The  novice,  if  he  were  to  apply  one  of  the 
tables  mentioned,  might  easily  find,  as  has  more 
than  once  been  the  case,  that  the  mortality  of  the 
particular  society  was  already  in  excess  of  his 
table.  On  the  other  hand,  in  some  cases  he  might 
find  that  the  actual  mortality  was  lower  even 
than  according  to  the  National  Fraternal  Con- 
gress Table  or  that  it  was  somewhere  between 
the  rates  in  that  table  and  in  the  standard  tables. 
He  will  also  discover  that  there  is  a  strong  ten- 
dency on  the  part  of  the  representatives  and  the 
ofl&cers  in  these  societies  to  readjust  the  rates 
on  the  basis  that  precisely  twelve  monthly  as- 


330  BUSINESS  OF  LIFE  INSURANCE 

sessments  per  year  are  to  be  brought  about 
without  producing  a  surplus  or  a  deficiency.  If 
he  is  entirely  new  at  the  work  he  may  even  fall 
into  the  error  of  supposing  that  this  may  be  ac- 
complished; but  although  his  knowledge  be 
sufficient  to  cause  him  to  refuse  his  assent  to  this 
proposition,  he  cannot  fail  to  be  impressed  that 
the  whole  spirit  of  the  fraternal  insurance  sys- 
tem is  that  no  larger  rate  should  be  required  to 
be  paid  than  is  believed  to  be  necessary,  and  that 
the  small  surplus  which  such  a  rate,  conserva- 
tively computed,  ought  to  produce,  be  employed 
in  passing  assessments  whenever  the  funds  are 
sufficient  to  do  so.  In  other  words,  he  will  dis- 
cover that  the  disposition  is  not  to  increase  the 
rates  more  than  is  believed  to  be  absolutely  nec- 
essary, and  this  is  but  fair,  taking  into  account 
that  the  members  have  in  the  past  supposed  that 
they  have  the  same  protection  at  the  low  rate 
which  they  have  been  paying  and  which  has 
proved  to  be  wholly  inadequate.  To  pass  to  re- 
dundant rates  would  be  too  great  a  change. 

All  of  these  considerations  signify  that  a  mor- 
tality table,  deduced  from  the  society's  own  ex- 
perience, if  it  is  large  enough  and  of  sufficient 
duration  to  afford  reliable  data,  is  to  be  pre- 
ferred to  all  other  standards.  At  this  point,  how- 
ever, it  is  necessary  to  give  voice  to  a  warning. 
The  aggregate  mortality  experience  of  practi- 
cally every  fraternal  society  is  so  affected  by  the 


FRATEENAL  READJUSTMENT  331 

years  of  exposure  of  lives  within  the  first  four 
or  five  years  after  their  admission  into  the  so- 
ciety and  just  after  passing  the  medical  exami- 
nation, that  it  cannot  be  relied  upon  as  a  correct 
guide  for  the  experience  which  will  almost  cer- 
tainly follow  a  readjustment,  during  which  it 
should  not  be  expected, although  it  may  be  hoped 
for,  that  there  will  be  any  considerable  accession 
of  new  members,  and  it  must  be  expected  that 
there  will  be  large  defections  on  the  part  of 
existing  members.  The  defections  on  the  part 
of  existing  members  will  probably  mean  suffi- 
cient adverse  selection  to  offset  the  favourable 
selection  in  the  mortality  on  account  of  the  mem- 
bers yet  remaining  within  the  first  five  years  of 
their  memberships,  and  therefore  it  is  not  rea- 
sonable to  expect  that  the  mortality  will  be  more 
favourable  than  the  ultimate  experience,  i.  e., 
the  experience  upon  lives  insured  in  the  society 
after  the  first  five  years  or  more  of  their  insur- 
ance has  elapsed.  In  other  words,  for  the  pur- 
pose of  computing  the  required  rates  of  pre- 
mium, it  is  necessary  that  there  be  made  from 
the  experience  of  the  society,  if  possible,  what  is 
known  as  an  ultimate  table  of  mortality. 

Even  in  these  ultimate  tables  the  experiences 
of  different  societies,  composed  of  members  of 
entirely  different  classes,  distinguished  in  vari- 
ous respects,  have  been  widely  different,  extend- 
ing from  a  table  as  low  or  lower  than  the  Na- 


332  BUSINESS  OF  LIFE  INSURANCE 

tional  Fraternal  Congress  Table  at  many  ages, 
to  a  table  materially  higher  at  many  ages  than 
the  so-called  standard  tables.  It  follows,  there- 
fore, that  before  anything  in  the  matter  of  re- 
adjustment of  rates  should  be  undertaken,  a 
thorough-going  investigation  of  the  society's  ex- 
perience should  be  made.  If  that  experience  is 
not  extensive  enough,  either  in  numbers  of  lives 
exposed  or  in  duration  of  insurances,  to  enable 
an  entire  mortality  table  to  be  deduced,  the  data 
should,  notwithstanding,  be  cast  into  such  form 
as  to  give  as  good  an  indication  as  possible  of 
the  probable  mortality,  and  by  means  of  this 
some  existing  table  may  be  selected  to  be  em- 
ployed either  with  suitable  modifications  or 
without  modification,  as  the  case  may  require. 

In  recent  years  no  fraternal  society  has  un- 
dertaken a  readjustment  of  its  rates  merely  by 
leaving  its  old  members  on  the  old  and  faulty 
plans,  while  applying  correct  rates  to  new  mem- 
bers. This  glaring  blunder  of  the  business  as- 
sessment associations  has  happily  been  avoided. 
In  consequence,  the  full  shock  of  the  readjust- 
ments has  usually  been  felt  by  the  entire  mem- 
bership. In  some  cases  there  has  been  a  loss  of 
membership  of  from  25  per  cent,  to  as  high  as  40 
per  cent. ;  but  if  the  new  rates  are*  in  fact  ade- 
quate and  if  the  society  gets  upon  a  genuinely 
sound  and  solvent  basis,  this  does  not  matter 
much. 


FRATERNAL  READJUSTMENT  333 

vVTiile  the  plan  of  giving  rates  at  age  at  entry 
and  charging  liens  for  the  reserve  has  not  been 
employed  as  a  matter  of  compulsion  by  any  fra- 
ternal beneficiary  society,  the  privilege  is  grant- 
ed by  some  of  them  that  a  member  may  go  back 
to  his  rate  at  age  at  entry  by  consenting  to  have 
such  a  lien  charged  and  to  pay  interest  upon  the 
same.  It  has  been  found,  however,  at  the  most, 
that  not  more  than  one  member  in  fifteen  desires 
to  make  such  a  change.  By  far  the  majority 
have  consented  to  pay  the  rate  at  the  full 
attained  age. 

That  the  changes  from  assessment  plans  to 
sound  plans  has  so  far  taken  place  without  a 
large  number  of  failures  is  a  remarkable  cir- 
cumstance well  worthy  of  mention.  The  changes, 
even  when  very  extensively  affecting  a  vast 
number  of  people,  have  frequently  been  carried 
into  effect  with  a  small  diminution  of  the  mem- 
bership, which  gave  way  also  in  a  short  time  to 
an  advance  in  membership,  confidence  being 
soon  re-established.  The  American  people  have 
much  to  blush  for,  that  they  ever  permitted  the 
aberration  of  assessmentism  to  sweep  over  the 
country,  but  they  have  also  good  reason  to  con- 
gratulate themselves  that  the  consequences  have 
not  been  more  serious. 


CHAPTER  XXXI. 

STATE  AND  NATIONAL  SUPEBVISION 

The  supervision  of  the  life  insurance  business 
and  of  life  insurance  companies  by  State  and 
National  authorities  has  taken  various  forms  in 
different  countries.  Thus,  in  Great  Britain, 
there  was  stubborn  resistance  to  the  introduc- 
tion of  any  form  of  supervision  whatever.  Life 
insurance  companies  were  organised  there  un- 
der the  ordinary  stock  company  laws,  with  as 
large  an  authorised  capital  and  as  small  a  part 
of  it  paid  in  as  they  desired.  They  also  reported 
their  entire  assets,  beyond  liabilities  actually  ac- 
crued, as  surplus,  or  otherwise  valued  their  poli- 
cies on  any  basis  they  chose,  including  counting 
the  gross  premiums  receivable  in  future  as 
wholly  available  to  offset  future  policy  liabili- 
ties. In  consequence,  the  most  misleading  bal- 
ance sheets  were  put  forth,  with  sometimes  the 
present  value  of  future  premiums  producing  so 
large  a  surplus  that  it  appeared  that  all  the  re- 
sources presently  possessed  by  the  company 
were  surplus,  with  a  considerable  margin  above 
that. 

321 


STATE  SUPERVISION  335 

Notwithstanding  the  stubborn  disinclination 
of  the  true  Briton  to  submit  to  State  regulation 
and  interference  with  his  private  business,  this 
could  not  go  on  unchecked  forever.  Sooner  or 
later  actual  commercial  insolvency,  in  the  sense 
that  the  companies  were  unable  to  meet  their 
present,  matured  liabilities,  overtook  several  of 
them  and  there  was  a  great  scandal  about  it. 
Charles  Dickens,  the  eminent  novelist,  made  the 
hardships  incurred  by  the  unsuspecting  who  en- 
trusted their  hard  earnings  to  these  concerns, 
the  principal  motive  in  one  of  his  most  impor- 
tant novels.  The  rising  young  statesman  of  that 
day,  who  afterward  became  known  as  **the  great 
commoner"  of  his  generation,  Gladstone,  also 
seized  upon  these  evils  as  a  target  for  his  philip- 
pics in  the  House  of  Commons.  His  proposal 
was  that  the  life  companies  should  be  subjected 
to  a  very  strict  system  of  supervision,  including 
official  valuation  of  their  policies,  and  that  in 
addition  to  this  there  should  be  established  a 
State  system  of  insurance,  operated  through  the 
post-offices,  which  by  its  competition  would  com- 
pel the  companies  to  charge  fair  rates  of  pre- 
mium. 

In  the  face  of  bitter  opposition  he  succeeded 
in  carrying  these  measures,  with  some  modifica- 
tions. The  provision  for  supervision  was  al- 
tered, however,  so  that  in  the  main  requirements 
are  only  as  follows,  viz. :    No  new  company  can 


336  BUSINESS  OF  LIFE  INSURANCE 

be  established  until  it  has  deposited  with  the 
Board  of  Trade  $100,000  in  acceptable  securities 
as  stipulated  in  the  act,  which  cannot  be  with- 
drawn until  the  company  has  accumulated  re- 
sources from  its  premiums  in  excess  of  this 
amount.  An  annual  report  is  required  likewise, 
setting  forth  the  income  and  outgo  and  the  re- 
sources ana  liabilities  other  than  reserves.  At 
least  every  five  years  a  valuation  of  the  policies 
is  required,  according  to  a  table  of  mortality  and 
a  rate  of  interest  to  be  selected  by  the  company 
and  to  be  specified  in  the  returns ;  much  of  the 
valuation  data  must  be  furnished  also,  and,  in 
case  the  valuation  is  not  by  net  premiums,  then 
the  amount  of  deduction  from  the  gross  pre- 
miums to  cover  future  expenses  must  be  dis- 
tinctly specified.  In  addition  to  this,  it  is  pro- 
vided that  by  appeal  to  the  courts  a  company 
can  be  wound  up  when  found  insolvent  on  the 
basis  of  reserves  according  to  what  is  known  in 
the  United  States  as  the  Actuaries'  Table  and  4 
per  cent,  interest;  but  this  last-mentioned  pro- 
vision has  rarely  been  availed  of. 

Although  these  simple  requirements  appear  to 
an  American,  accustomed  to  a  much  stricter  sys- 
tem of  supervision,  to  be  weak  and  futile,  they 
were  suflicient  together  with  the  popular  outcry 
against  mismanagement  to  check  the  depreda- 
tions of  scoundrels  and  schemers,  and  the  Brit- 
ish life  insurance  companies  have,  on  the  whole, 


STATE  SUPERVISION  337 

enjoyed  a  very  liigh  reputation  since  that  time 
for  good  management,  sound  methods  and  un- 
doubted solvency. 

There  is,  notwithstanding,  nothing  to  prevent 
assessment  associations  from  qualifying  under 
this  law.  The  result  was  that  a  large  American 
association  entered  Great  Britain,  making  the 
required  deposit,  which  it  also  had  a  right  to 
take  down  soon  afterward,  and  conducted  an 
assessment  life  insurance  business  there  for 
many  years  without  interference  on  the  part  of 
the  authorities  and  imder  precisely  the  same 
law  under  which  the  regular  life  insurance 
companies  operated.  After  this  weakness  in 
supervision,  which  really  amounted  to  complic- 
ity, had  permitted  the  concern  to  carry  on 
the  business,  there  was  recently  enforced, 
through  a  decision  confirmed  by  the  House  of 
Lords,  a  construction  of  the  contracts  of  the 
company  which,  had  it  been  applied  to  any  of 
its  valuations,  would  have  shown  it  to  be  insol- 
vent, or,  more  correctly,  it  was  adjudged  that 
the  company  had  held  out  its  policies  to  be  of 
that  character,  though  they  were  not,  and  there- 
by had  committed  a  fraud.  This  fraud,  if  fraud 
it  was,  had  been  perpetrated  day  after  day  un- 
der the  very  nose  of  the  authorities  and  with 
their  full  knowledge,  but  without  interference, 
and  the  decision  of  the  courts  was  manifestly! 
unfair  unless  it  be  taken  as  an  indictment  of  the 


338  BUSINESS  OF  LIFE  INSURANCE 

laws  of  the  country,  as  well  as  an  indictment  of 
the  company  itself.  It  forbade,  in  effect,  the  re- 
organisation of  the  association  upon  a  sound 
basis,  and  is  in  marked  contrast  with  the  consid- 
eration with  which  certain  British  societies  of 
the  same  general  type  were  treated  at  an  earlier 
date,  when  they  were  compelled  to  undergo  re- 
organisation. 

Yet  more  recently  there  has  been  a  scandal 
likewise  under  the  loose  operation  of  the  British 
form  of  supervision,  because  a  certain  trading 
company  engaged  in  the  tea  business  had  prom- 
ised promiscuously  to  pay  pensions  after  the 
deaths  of  their  husbands  to  women  who  pur- 
chased tea.  This  concern,  after  having  built  up 
an  immense  business  in  this  manner,  was  rather 
tardily  required  to  qualify  by  the  deposit  of 
securities  as  a  life  insurance  company.  When  it 
failed,  shortly  afterward,  it  was  discovered  that 
the  present  value  of  the  pensions  promised  by  it 
was  far  in  excess  of  $50,000,000,  while  the  re- 
sources were  less  than  one  twenty-fifth  that  sum. 

In  addition  to  this,  a  fraternal  society  hailing 
from  this  side  of  the  water  has  been  doing  busi- 
ness in  Great  Britain  for  some  years,  having 
qualified  under  the  same  act,  and  has  filed  two 
valuations  of  its  policies,  in  both  cases  showing 
an  enormous  deficiency  on  a  valuation  of  the 
usual  sort,  but  asserting  that  this  deficiency  was 
turned  into  a  surplus  by  selecting  a  form  of  val- 


STATE  SUPERVISION  339 

uati on  which  assumes  a  heavy  rate  of  lapse.  This 
matter  has  been  an  open  scandal  in  Great  Britain 
for  some  time  and  shows  clearly  that  the  present 
laws  for  the  supervision  of  life  insurance  compa- 
nies are  fatally  defective  and  offer  nothing  like 
the  protection  that  they  ought  to  persons  who 
purchase  life  insurance  policies  and  annities. 

In  the  United  States,  as  has  been  said,  there 
has  been  gross  neglect  of  requirements  of  sol- 
vency for  assessment  and  fraternal  societies, 
and  as  to  regular  insurance  companies  super- 
vision has  mainly  been  concerned  in  insisting 
that  assets  should  be  held,  sufficient  to  assure 
the  payment  of  the  policies  upon  maturity  be- 
yond all  question.  "While,  of  course,  there  is  no 
such  virtue  in  legislation  as  will  effectually  pre- 
vent the  aggregate  resources  from  falling  below 
tlie  aggregate  liabilities,  there  is  this  virtue 
when  reports  and  valuations  are  required  each 
year,  viz.,  that,  unless  the  supervision  is  affected 
by  collusion  or  utter  incapacity,  the  existence  of 
a  deficiency  will  be  discovered  before  it  has  be- 
come so  large  that  the  company  is  irretrievably 
ruined.  In  the  last  twenty-five  years  there  have 
been  many  instances  of  this,  and,  indeed,  since 
State  supervision  was  introduced  in  the  United 
States,  the  number  of  utter  failures  among  regu- 
lar life  insurance  companies,  as  distinguished 
from  instances  where  reinsurance  was  effected, 
has  been  very  smaU  indeed. 


340  BUSINESS  OF  LIFE  INSURANCE 

While,  in  a  more  or  less  experimental  fashion, 
life  insurance  supervision  had  been  attempted 
in  more  than  one  State  before  the  appointment 
of  two  commissioners  of  insurance  in  the  State 
of  Massachusetts,  in  1858,  this  appointment, 
which  brought  Elizur  Wright  forward  as  one  of 
the  commissioners,  may  be  regarded  as  virtually 
the  starting  point  of  supervision  of  life  insur- 
ance in  this  country.  What  Elizur  Wright  did 
to  introduce  a  proper  system  of  net  valuation  as 
a  test  of  solvency  has  already  been  related  in 
these  pages,  and  it  is  not  necessary  to  do  more 
than  to  refer  to  the  same  again.  His  selection 
of  a  mortality  table  fairly  representing  the  ac- 
tual experience  of  life  insurance  companies,  his 
resolute  championship  of  net  valuation  as 
against  the  valuation  of  gross  premiums,  and  his 
insistence  that  no  life  insurance  company  should 
be  permitted  to  do  business  that  could  not  dem- 
onstrate its  ability  to  carry  out  its  contracts, 
soon  placed  the  department  of  Massachusetts  in 
a  position  of  authority  which  has  since  been 
maintained  constantly  by  the  exceptional  hon- 
esty and  unswerving  devotion  to  duty  of  his  suc- 
cessors in  office. 

Supervision  of  life  insurance  companies  was 
soon  introduced  in  most  of  the  other  important 
States  likewise,  the  State  of  New  York  being 
among  the  first.  New  York  had  for  its  first 
superintendent  of  insurance  a  maa  of  the  high- 


STATE  SUPERVISION  341 

est  probity  and  of  great  ability,  Hon.  William 
Barnes,  but,  unfortunately,  since  that  time, 
while  the  post  has  in  several  instances  been  filled 
by  men  of  the  highest  character,  both  for  ability 
and  honesty,  it  has  also  several  times  been  occu- 
pied by  individuals  concerning  whom  and  their 
administration  of  this  office  it  would  not  be  pos- 
sible to  say  anything  good. 

One  of  the  duties  of  the  officer  to  whom  is  en- 
trusted the  supervision  of  life  insurance  is  the 
examination  of  the  companies  from  time  to  time* 
In  Massachusetts  and  in  some  other  States,  the 
department  is  required  to  make  an  examination 
at  least  once  every  three  years  or  five  years,  as 
the  case  may  be;  but  in  other  States  examina- 
tions are  made  at  the  discretion  of  the  commis- 
sioner or  superintendent.  The  efficiency  of 
supervision  in  a  State  may  be  judged  by  the  fre- 
quency and  thoroughness  of  the  examinations  of 
companies  domiciled  therein.  Partly  in  conse- 
quence of  neglect  in  this  regard,  it  has  now  and 
then  happened  that  companies  by  means  of  false 
reports  to  the  home  departments  have  been  able 
to  continue  doing  business  for  several  years 
after  they  had  become  insolvent,  and  to  hold 
themselves  out  to  the  public  as  solvent  institu- 
tions, being  provided  with  a  certificate  from  the 
home  department  to  that  effect. 

Originally,  examinations  were  made  in  all 
cases  at  the  expense  of  the  company.  Naturally, 


342  BUSINESS  OF  LIFE  INSURANCE 

this  soon  became  a  matter  of  much  scandal.  In 
the  first  place  whenever  venal  legislators  de- 
sired to  provide  for  hangers-on,  it  was  a  simple 
matter,  and  frequently  popular  likewise,  to  order 
an  examination  of  one  or  more  insurance  com- 
panies. In  the  second  place,  by  means  of  these 
examinations,  if  there  was  anything  to  criticise, 
large  amounts  could  be  wrung  from  the  com- 
panies in  blackmail.  During  the  earlier  days  of 
supervision  there  were  many  instances  of  both 
evils,  and  it  became  necessary,  in  order  to  pre- 
vent them,  either  to  provide  that  the  examina- 
tion should  be  made  at  the  expense  of  the  State 
or  that  the  cost  of  the  same  should  be  covered 
into  the  State  treasury  and  the  persons  employ- 
ed as  examiners  should  be  compensated  by  the 
State.  Wherever  the  former  method  has  been 
introduced  there  has  been  practically  no  com- 
plaint as  to  the  continuance  or  the  revival  of  the 
old  evils,  and  under  the  latter  system  complaints 
have  been  infrequent. 

Another  form  of  abuse,  however,  perhaps  in- 
eradicable so  long  as  there  is  notNational  super- 
vision and  State  supervision  continues,  is  the 
examination  of  companies  of  other  States,  which 
are  licensed  to  do  business  in  the  State.  These 
examinations  are  frequently  undertaken  with- 
out any  good  reason  and  merely  for  purposes  of 
private  emolument.  Most  frequently  they  are 
made  by  the  wholesale,  the  examiners  starting 


STATE  SUPERVISION        '     343 

out  from  home  and  making  or  pretending  to 
make  one  examination  after  another,  in  each  case 
charging  for  the  expense  of  a  railroad  return 
trip  and  for  hotel  and  other  bills,  and  exacting  a 
per  diem  which  they  really  do  nothing  to  earn. 

This  has  been  carried  so  far  that  one  bold 
buccaneer  actually  invaded  the  home  office  of  a 
company  in  Great  Britain,  presented  his  card, 
insisted  on  the  privilege  of  examining  the  com- 
pany, and  for  a  very  superficial  glance  at  its 
books  exacted  the  cost  of  his  European  trip.  In 
this  country  the  evil  has  been  rampant,  and  yet 
there  appears  to  be  no  way  to  extirpate  it,  so 
long  as  there  is  not  a  system  of  National  super- 
vision. 

In  the  National  Convention  of  State  Insurance 
Commissioners  and  elsewhere  it  has  been  from 
time  to  time  proposed  that  a  rule  be  established 
that  the  certificate  of  the  department  of  the  com- 
pany's  home  State  be  accepted  in  all  cases,  and 
that  no  examination  be  made  or  required  other 
than  by  the  department  of  the  home  State.  It 
will  never  be  possible  to  secure  compliance  with 
this  ruling,  so  long  as  there  is  not  an  effectual 
system  of  National  supervision,  for  the  reason 
that  the  insurance  department  of  a  State  is 
charged  with  the  protection  of  the  people  of  that 
State,  and  in  all  cases,  if  the  administration  of 
the  department  of  another  State  is  known  to  be 
corrupt  or  to  be  improperly  influenced  by  politi- 


344  BUSINESS  OF  LIFE  INSURANCE 

ical  considerations,  so  that  its  certificate  as  to  a 
particular  company  is  of  doubtful  value,  it  be- 
comes the  duty  of  the  State  insurance  commis- 
sioner or  superintendent  to  refuse  to  accept  its 
certificate  and  to  insist  upon  an  independent 
investigation  of  the  company's  affairs.  It  has 
been  suggested  that  in  such  cases  he  should  first 
ask  the  department  of  the  home  State  to  make 
an  examination,  but  it  is  manifest  that  in  many 
instances  he  would  feel  that  such  an  examination 
(Would  be  as  worthless  as  the  certificate  already 
in  his  hands. 

Another  evil  which  has  sprung  up  in  connec- 
tion with  these  examinations  has  been  the  em- 
ployment of  consulting  actuaries  not  connected 
with  the  State  department,  but  having  a  connec- 
tion with  the  company  examined.  It  seems  al- 
most incredible  that  the  impropriety  of  a  con- 
sulting actuary,  known  to  be  retained  by  a  par- 
ticular company,  being  permitted  to  make  an 
examination  of  that  company  for  a  State  depart- 
ment, should  not  be  so  clear  that  by  no  possibil- 
ity could  it  have  been  consented  to  by  the  depart- 
ment, the  public  or  even  the  actuary  himself. 
Yet  notoriously  this  has  been  done  in  more  than 
one  instance.  Even  at  the  present  time  the  sen- 
timent against  it  is  not  so  strong  that  it  would 
not  be  possible  for  it  to  be  repeated.  It  would 
be  well  perhaps  if  every  department  were  to 
provide  itself  with  an  actuary  and  examiners 


STATE  SUPERVISION  345 

capable  of  making  sucli  investigations,  but  in 
any  event  actuaries  should  not  be  employed  who 
are  also  employed  by  the  company  undergoing 
investigation. 

A  yet  more  serious  evil,  however,  within  the 
departments  themselves  has  been  the  connec- 
tion, in  a  consulting  capacity,  of  department 
actuaries  with  companies  which  were  subject  to 
their  supervision  and  which  upon  occasion  they 
examined.  In  several  instances,  partly  as  a  con- 
sequence of  this,  no  doubt,  reprehensible  prac- 
tices have  been  permitted  to  spring  up  until  they 
have  become  a  public  scandal.  The  * '  investment 
bond"  business,  to  which  reference  has  already 
been  made  in  these  pages,  was  fostered  by  the 
connivance  of  certain  department  actuaries  who 
were  also  connected  with  the  companies  as  con- 
sultants or  at  various  times  did  work  for  them  in 
that  capacity. 

Another  evil  has  been  the  variations  in  the 
rulings  of  the  commissioners  of  the  same  State 
from  time  to  time  and  of  the  commissioners  of 
different  States  at  all  times.  At  one  period  in  the 
history  of  life  insurance  great  and  undue  laxity 
in  the  matter  of  accepting  advances  to  agents, 
commuted  commissions,  furniture  and  fixtures 
and  other  items  as  available  assets,  followed  by 
sudden  and  undue  severity,  which  cut  out  all  or 
practically  all  of  these  allowances,  played  an 
important  part  in  causing  the  ruin  of  many  com- 


346  BUSINESS  OF  LIFE  INSURANCE 

panies,  which  would  not  otherwise  have  been 
compelled  to  go  to  the  wall,  but  might  have  been 
preserved  permanently.  In  recent  years  the  re- 
versal of  the  practice  of  one  of  the  smaller  States 
in  the  matter  of  accepting  valuations  on  a  pre- 
liminary term  basis,  caused  the  downfall  and 
reinsurance  of  a  small  but  perfectly  solvent  life 
insurance  company  domiciled  in  that  State.  The 
new  ruling  was  also  so  far  from  being  justified 
that  it  was  reversed  by  the  unanimous  vote  of 
the  judges  of  the  Supreme  Court  of  the  State, 
but  too  late  to  save  the  company.  In  all  cases 
where  the  companies  depend  upon  rulings  of  de- 
partments, therefore,  they  are  more  or  less  in 
danger.  It  would  be  well  if  these  rulings  could 
be  given  such  authority  and  weight  that,  once 
made,  they  would  not  and  could  not  be  over- 
thrown, but  would  stand  as  precedents  until 
after  a  full  hearing,  similar  to  a  trial  in  court, 
they  have  been  adjudged  erroneous.  Or  perhaps 
it  would  be  better  still  if  the  companies  were 
everywhere  permitted  to  appeal  to  the  courts. 
This  they  are  able  to  do  in  some  States,  and  the 
ruling  last  referred  to  was  set  aside  by  the 
Supreme  Court  of  the  State  upon  the  appeal  of 
one  of  the  companies  aggrieved.  But  in  some 
States,  notably  Massachusetts,  the  ruling  of  the 
commissioner  is  final  until  he  has  himself  re- 
versed it,  unless  it  can  be  proved  that  h^  lias 
wilfully  abused  his  discretion. 


STATE  SUPERVISION  347 

There  is  also  a  want  of  uniformity  in  the  laws 
of  the  various  States,  which  the  commissioners, 
meeting  in  convention,  have,  so  far  without  com- 
plete success,  endeavoured  to  obviate  by  making 
recommendations  for  legislation  in  the  different 
States  so  as  to  bring  about  uniformity.  This 
certainly  is  very  much  to  be  desired,  but  is  prob- 
ably hopeless,  so  long  as  the  matter  is  in  the 
hands  of  the  legislators  of  forty  different  States. 
In  other  words,  we  shall  probably  never  have 
uniform  laws  regulating  life  insurance  through- 
out the  country  until  National  supervision  has 
been  introduced.  Life  insurance  interests,  as  a 
whole,  are  warmly  favourable  to  National  super- 
vision on  the  following  grounds,  viz. : 

First,  it  would  go  a  long  way  toward  securing 
uniform  regulation  and  supervision  of  life  in- 
surance companies. 

Second,  reports  to  the  National  department 
and  examinations  by  it  would  entitle  a  company 
to  admission  to  all  the  States. 

Third,  discrimination  on  the  part  of  a  State 
in  taxation  against  companies  of  other  States 
would  probably  not  be  permitted. 

Fourth,  the  certificates  of  the  National  depart- 
ment of  insurance  would  have  much  greater 
weight  in  foreign  countries. 

Fifth,  if  insurance  were  directly  under  the 
supervision  of  the  National  government  the  Fed- 
eral authorities  would  be  in  a  better  position  to 


348  BUSINESS  OF  LIFE  INSURANCE 

protect  the  interests  of  American  life  insurance 
companies  abroad. 

Sixth,  probably  in  the  course  of  time  State 
supervision,  with  its  petty  exactions,  its  possi- 
bilities of  blackmail  and  extortion,  and  its  forty 
separate  establishments  with  their  large  ex- 
penses, would  pass  away. 

Just  how  much  opposition  could  be  mustered 
against  the  proposal  to  establish  a  system  of 
National  supervision  it  is  not  easy  to  estimate, 
for  the  reason  that  up  to  the  present  time  the 
impracticability  of  the  scheme  has  prevented  the 
opposition  from  showing  its  strength.  The  plan 
is  understood  to  be  favoured  by  the  present 
administration,  which  indeed  has  made  a  start  in 
that  direction,  through  certain  inquiries  under 
the  direction  of  the  Department  of  Commerce 
and  Labour.  But  an  obstacle  which  seems  to  be 
insuperable  is  that  many  years  ago  the  Supreme 
Court  of  the  United  States  decided  in  a  famous 
case  entitled  **Paul  vs.  Virginia,"  that  insur- 
ance is  not  commerce,  and  this  decision  has  been 
confirmed  by  repeated  adjudications  since  that 
time.  It  is  clear,  therefore,  that  unless  this  can 
be  reversed  the  supervision  of  insurance  as  a 
part  of  inter-state  commerce  cannot  be  assumed 
by  the  National  government.  There  is  no  rea- 
sonable doubt  that  insurance  nowadays,  what- 
ever may  have  been  the  case  many  years  ago,  is 
not  merely  a  part  of  the  commerce  of  the  coun- 


STATE  SUPERVISION  349 

try,  but  is  also  a  most  important  part;  but  de- 
cisions of  the  Supreme  Court  of  the  United 
States  are  very  stubborn  things,  and  whether 
the  plain  logic  of  facts  would  suffice  to  cause 
that  court  to  reverse  its  previous  attitude  in  this 
matter  is  very  doubtful.  In  any  event,  no  at- 
tempt has  so  far  been  made  to  cause  the  ques- 
tion to  come  up  for  a  rehearing,  and,  until  this 
has  been  done,  or,  as  an  alternative,  the  Consti- 
tution itself  has  been  amended,  it  is  idle  to  talk 
of  National  supervision. 


CHAPTER  XXXn 

THE  ANNUAL  STATEMENT 

The  following  is  a  copy  of  the  form  of  the  life 
insurance  statement  to  the  insurance  depart- 
ment that  is  usually  given  to  the  public : 

ANNUAL  STATEMENT. 

Income — 

First  year's  premiums  on  original 
policies  without  deduction  for  com- 
missions or  other  expenses,  less 
$ for  first  year's  reinsur- 
ance   $ 

Surrender  values  applied  to  pay  first 
year's  premiums $ 


Total  first  year's  premiums  on  orig- 
inal policies $ 

Dividends  applied  to  purchase  paid- 
up  additions  and  annuities $ 

Consideration  for  original  annui- 
ties involving  life  contingencies ...  $ 

350 


THE   ANNUAL   STATEMENT      351 

Consideration  for  supplementary  con- 
tracts involving  life  contingencies .  $ 


Total  new  premiums $ 

Renewal  premiums  without  deduction 
for  commissions  or  other  expenses, 

less  $ for  reinsurance  on 

renewals $ 

Dividends  applied  to  pay  renewal  pre- 
miums  $ 

Surrender  values  applied  to  pay  re- 
newal premiums $ 

Renewal  premiums  for  deferred  an- 
nuities   $ 


Total  renewal  premiums $ 

Total  premium  income $ 

Consideration  for  supplementary  con- 
tracts not  involving  life  contingen- 
cies   $ 

Interest  on  mortgage  loans.  .$ 

Interest  on  collateral  loans.  .$ 

Interest  on  bonds  and  divi- 
dends on  stocks $ 

Interest  on  policy  loans  or 
liens $ 

Interest  on  other  debts  due 
the  company $ 

Rent $ 


Total  interest  and  rents $ 


352  BUSINESS  OF  LIFE  INSURANCE 

Profit  on  sale  or  maturity  of  ledger 
assets $ 


Total  income $ 

Ledger  assets  December  31st $ 


Total $ 

Disbursements — 

For  death  claims,  $....;  ad- 
ditions, $....;  total $ 

For  matured  endowments, 
$....;  additions,  $....; 
total $ 

Total  amount  paid  for 
death  claims  and  ma- 
tured endowments $ 

For  annuities  involving  life 
contingencies  $ 

Surrender  values  paid  in 
cash $ 

Surrender  values  applied  to 
pay  new  premiums $ 

Surrender  values  applied  to 
pay  renewal  premiums.  ...$ 

Dividends  paid  to  policyhold- 
ers in  cash $ 

Dividends  applied  to  pay  re- 
newal premiums .$ 


THE   ANNUAL   STATEMENT      353 

Dividends  applied  to  pur- 
chase paid-up  additions 
and  annuities $ 

Total  paid  policyholders $ 

Paid  for  claims  on  supplementary 
contracts  not  involving  life  contin- 
gencies   $ 

Commissions  and  bonuses  to  agents 
(less  commission  on  reinsurance) 
first  year's  premiums,  $....;  re- 
newal premiums,  $ . . . ;  on  annuities 
(original  renewal),  $. . . . ;  total. . .  .$ 
Salaries  and  allowances  for  agencies, 
including    managers,    agents    and 

clerks  $ 

Agency  supervision,  travelling  and  all 

other  agency  expenses $ 

Medical  examiner's  fees,  $....;  in- 
spection of  risks,  $ ;  total $ 

Salaries  and  all  other  compensation 
of  officers  and  home  office  em- 
ployees   $ 

Bent  $ 

Advertising,  $ ;  printing  and  sta- 
tionery, $ ;  postage,  $....;  total .  $ 

Legal  expenses $ 

Furniture  and  fixtures $ 

Insurance,  taxes,  licenses  and  depart- 
ment fees $ 


354  BUSINESS  OF  LIFE  INSURANCE 

Taxes  on  real  estate $ 

Repairs  and  expenses  (other  than 
taxes)  on  real  estate $ 

Loss  on  sale  or  maturity  of  ledger  as- 
sets   $ 

All  other  disbursements .$ 


Total  disbursements $ 

Balance $ 

Ledger  Assets — 

Book  value  of  real  estate $ 

Mortgage  loans  on  real  estate $ 

Collateral  loans $ 

(Schedule  of  same.) 
Loans  made  to  policyholders  on  this 
company's  policies  assigned  as  col- 
lateral   $ 

Stocks  and  bonds  owned  by  the  com- 
pany   $ 

(Schedule  of  same.) 
Deposited   in    trust    companies    and 

banks  on  interest $ 

Cash  in  office $ 

Suspense  account $ 

Agents'  balances $ 


Total  ledger  assets $ 

Non-Ledger  Assets — 
Interest  due  and  accrued  on 
mortgages $ 


THE   ANNUAL    STATEMENT      355 

Interest  accrued  on  bonds 
and  stocks $ 

Interest  due  and  accrued  on 
collateral  loans $ 

Interest  accrued  on  policy 
loans  or  liens $ 

Interest  accrued  on  other  as- 
sets   $ 

Eents  due  and  accrued  on 
company's  property  or 
lease $ 


Total $ 

Market  value  of  bonds  and  stocks  over 
book  value $ 


New  ', 

Business.     Renewals.  1 

Gross  premiums  due  | 

and  unreported. .  .$  $ 

Gross  deferred  pre-  i 

miums  $  $  ■ 

Totals $  $ 

Deduct  loading $  $  ; 

Totals $  $ 

Net  amount  of  uncollected  and  de- 
ferred premiums $  i 

— - 

Gross  assets $  \ 

1 


356  BUSINESS  OF  LIFE  INSURANCE 

Deduct  assets  not  admitted — 

Suspense  account $ 

Agents '  debit  balances $ 

Total $ 


Total  admitted  assets $ 

Liabilities — 

Net  present  value  of  all  the 
outstanding  policies  in 
force  on  the  31st  day  of 
December,  1903,  computed 
by  the  Insurance  Depart- 
ment on  the  Combined  and 
American  Experience  Ta- 
bles of  Mortality,  with  4 
and  3|  per  cent,  interest..  .$ 

Same  for  reversionary  ad- 
ditions    $ 

Same  for  annuities $ 

Total $ 

Deduct  net  value  of  risks  of 
this  company  reinsured  in 
other  solvent  companies.  .$ 

Net  reserve $ 

Present  value  of  amounts  not  yet  due 
on  supplementary  contracts  not  in- 
volving life  contingencies $ 


THE   ANNUAL   STATEMENT      357 

Death  losses  in  process  of 
adjustment  or  adjusted 
and  not  due $ 

Death  losses  reported,  no 
proofs  received $ 

Matured  endowments  due 
and  unpaid $ 

Death  losses  and  other  policy 
claims  resisted  by  the  com- 
pany   $ 

Annuity  claims  involving  life 
contingencies  due  and  un- 
paid   $ 

Total  policy  claims $ 

Premiums  paid  in  advance $ 

Dividends  or  other  profits  due  policy- 
holders   $ 

Beserve    for    contingent    guarantee 

fund ^ $ 

Surplus  to  be  apportioned  in  19 — $ 


Total  liabilities $ 


358  BUSINESS  OF  LIFE  INSURANCE 


EXHIBIT  OF  POLICIES  i 

i 

NUMBER  AND  AMOUNT  OF  POLICIES  AND  ADDITIONS  I 

CLASSIFIED,  INCLUDING  PAID-FOB  \ 

BUSINESS   ONLY  J 

Policies  in  force  at  the  commencement  of  tlie  \ 

year,  including  additions :  \ 

\ 

Number.       Amount. 

Whole  life  policies $  \ 

Endowment  policies ...                                 $  \ 

All  other  policies   (in-  l 

eluding    return    pre-  : 

mium  additions) $  \ 

Additions  to  policies  by  \ 

dividends $  '{ 

New  policies  issued  during  the  year :  • 

Number.        Amount.  | 

"Whole  life  policies $  l 

Endowment  policies ...                                 $  | 

All  other  policies   (in-  J 

eluding    return   pre-  1 

mium  additions) $  ] 

Additions  to  policies  by  i 

dividends $ 


THE   ANNUAL   STATEMENT      359 
Old  policies  revived  during  the  year : 


Whole  life  policies .... 

Number.  Amount. 
$ 

Endowment  policies . . . 

$ 

All  other  policies   (in- 

cluding   return    pre- 

mium additions) 

$ 

Additions  to  policies  by 

dividends 

$ 

Old  policies  increased : 

Whole  life  policies .... 

Number.  Amount. 
$ 

Endowment  policies . . . 

$ 

All  other  policies  (in- 

cluding  return   pre- 

mium additions) 

$ 

Transfers,  deductions: 

Whole  life  policies .... 

Endowment  policies . . . 

All  other  policies  (in- 
cluding return  pre- 
mium additions) . . . . 

Transfers,  additions: 

Whole  life  policies. . . . 
Endowment  policies . , , 


Number. 


Amount. 
$ 

$ 


JJumber. 


Amount. 

$ 


360  BUSINESS  OF  LIFE  INSURANCE 

.  .  Number.       Amount. 

All  other  policies  (in- 
cluding return  pre- 
mium additions) ....  $ 

Totals  after  transfers $ 

Deduct  policies  decreased  and  ceased 

to  be  in  force $ 


Total  policies  in  force  at  the  end 
of  the  year $ 


Policies  in  force  at  the  end  of  the  year,  includ- 
ing additions : 

Number.       Amount. 

"Whole  life  policies ....  $ 

Endowment  policies . . .  *          $ 

All  other  policies  (in- 
cluding return  pre- 
mium additions) ....  $ 

Reversionary  additions  $ 

Total  policies  in  force  at  the  end 
of  the  year $ 

Policies  which  have  ceased  to  be  in  force  dur- 
ing the  year,  with  the  mode  of  their  termination : 

Number.       Amount. 

Terminated  by  death . .  $ 
By  maturity    (endow- 
ments)  $ 


THE   ANNUAL   STATEMENT       361 

Number.        Amount. 

By  expiry  (term) $ 

By  surrender $ 

By  lapse $ 

By  decrease $ 


Totals   $ 

Annuities  in  force  December  31st, 

19— $ 

BUSINESS  IN  NEW  YORK. 

On  the  lives  of  citizens  of  New  York : 

Number.        Amount. 

Policies  in  force  De- 
cember 31st,  19 — . . .  $ 

Policies  issued  during 
19— $ 


Total $ 

Deduct  policies  ceased 
to  be  in  force  dur- 
ing 19— $ 

Policies  in  force  in  New 

York  Dec.  31st,  19—.  $ 

Losses  and  claims  un- 
paid Dec.  31st,  19— . .  $ 

Losses  and  claims  in- 
curred during  19 — . .  $ 


Total  $ 


362    BUSINESS  OF  LIFE  INSURANCE 

Number.       Amount. 

Losses  and  claims  on 
policies  in  New  York 
paid  during  19 — . ...  $ 

Losses  and  claims  un- 
paid Dec.  31st,  19—. .  $ 

Premiums  collected  or 
secured  in  New  York 
in  cash  and  notes  or 
credits  during  19 — , 
without  any  deduc- 
tion for  losses,  divi- 
dends, commissions 
or  other  expenses ...  $ 

In  the  income  the  items  of  ''surrender 
values"  and  ''dividends"  applied  consist  of 
moneys  not  actually  paid  out  and  received 
again;  but  these  amounts  are  included  in  the 
surrender  values  and  dividends  paid,  in  order  to 
show  the  total,  and  so  are  entered  here  again  as 
a  part  of  the  income  in  order  to  balance  the 
account. 

The  "consideration  for  supplementary  con- 
tracts," appearing  twice  in  the  income,  is  also 
not  an  actual  receipt ;  when  a  policy  which  is  to 
be  paid  in  instalments,  or  by  an  annuity,  matures 
by  death  or  otherwise,  the  total  present  value  of 
the  benefits  is  entered  as  a  death  claim  or  ma- 
tured endowment,  and  then  this  item  for  the 
same  amount  is  entered  as  an  offset.  When  the 


THE   ANNUAL    STATEMENT       363 

benefit  is  payable  as  an  annuity  the  present 
value  is  entered  as  *' consideration  for  supple- 
mentary contracts  involving  life  contingencies, ' ' 
and  when  in  instalments  for  a  fixed  period  only, 
as  ''consideration  for  supplementary  contracts 
not  involving  life  contingencies.'* 

The  careful  separation  of  first-year  and  re- 
newal premiums  and  the  separate  statement  of 
interest  totals  by  classes  of  securities  is  an  ex- 
cellent feature  of  this  statement  form,  enabling 
the  financial  management  to  be  judged  pretty 
severely. 

The  item  of  "profit  on  sale  or  maturity  of 
ledger  assets"  represents  the  gains  already 
actually  realised  and  reduced  to  possession.  The 
* '  excess  of  market  values  over  book  values ' '  of 
the  securities  still  held  is  not  included  in  this. 

In  considering  a  company's  statement  it  is 
well  to  remember  that  the  three  items  of  "divi- 
dends" in  the  disbursements  will  give  but  a  very 
imperfect  and  misleading  basis  for  comparison 
as  to  returns  to  policyholders,  because  the  divi- 
dend systems,  and  especially  the  dividend  pe- 
riods, differ  widely,  so  that  one  company  may 
be  paying  a  large  amount  in  deferred  dividends, 
another  nothing  at  all  because  no  policies  have 
completed  their  periods,  and  yet  another  may  be 
paying  an  annual  dividend  to  each  of  its  poli- 
cies. 

What  is  required,  really,  is  an  addition  to  the 


364  BUSINESS  OF  LIFE  INSURANCE 

statement  blank,  calling  for  specimens  of  the 
annual  and  deferred  dividends  at  selected  ages 
for  all  plans  and  durations  paid  during  the 
preceding  year  or  accumulated  to  date  to  the 
provisional  or  absolute  credit  of  the  policies. 
The  insured  will  never  be  able  to  judge  discrimi- 
natingly as  to  the  comparative  merits  of  indi- 
vidual companies  and  their  policies  until  this  is 
required.  It  speaks  much  for  the  patience,  but 
little  for  the  wisdom,  of  Americans  that  this  has 
been  delayed  so  long  and  is  not  yet  here.  British 
companies  have  been  called  upon  to  make  simi- 
lar reports  for  thirty-five  years  past.  If  it  were 
introduced  here  it  would  result  in  competition 
in  "returns  to  policyholders"  instead  of  a  race 
for  bigness,  for  it  would  powerfully  stimulate 
the  efforts  of  companies  to  serve  their  patrons 
and  would  greatly  reduce  the  preliminary  ex- 
pense incurred  to  obtain  new  business,  which 
now  unquestionably  causes  policyholders  to  re- 
ceive lower  dividends  in  most  companies  than 
they  would  receive  if  nothing  at  all  were  paid  to 
secure  new  business,  and  only  that  amount  were 
transacted  which  would  come  in  without  solicita- 
tion. 

The  items  of  commissions  and  bonuses  to 
agents,  agency  salaries  and  allowances  and 
agency  supervision  expenses  are  nearly  wholly 
charges  for  obtaining  new  business.  It  is  credi- 
bly reported  that  the  experience  of  more  than 


THE   ANNUAL   STATEMENT      365 

one  company  shows  that  business  upon  which  no 
renewal  commission  is  paid,  renews  as  well  as 
that  upon  which  such  commission  is  allowed. 
Most,  if  not  all,  of  this  item  is  virtually  deferred 
compensation  for  writing  new  business  and  is 
frequently  paid  in  addition  to  an  immediate 
compensation  in  first  year's  commissions  that 
is  itself  excessive. 

Under  the  item  of  "legal  expenses"  unques- 
tionably items  of  expenditure  are  sometimes  in- 
cluded which  would  not  look  well  if  put  into 
plain  print.  Life  insurance  companies  are  every 
now  and  then  made  the  victims  of  legislative 
"strikes,"  as  well  as  of  departmental  raids. 

An  item  which  sometimes  appears  in  life  in- 
surance companies'  statements  also  is  "com- 
muted commissions."  This  means  sums  of 
monev  paid  to  agents  in  consideration  of  their 
releasing  their  claims  for  commissions  upon  re- 
newal premiums. 

Observe  that  the  form  of  statement  is  of 
"income"  and  "disbursements,"  and  not  "re- 
ceipts" and  "disbursements."  The  reason  for 
this  is  that  there  would  be  included  in  receipts, 
of  course,  the  repayments  of  investments,  and 
in  disbursements  the  payments  for  investments. 
The  first  of  these  does  not  really  belong  in  "in- 
come" account,  because  it  does  not  signify  that 
the  company  has  any  more  assets  on  account  of 
the  change  than  it  had  before,  and  the  latter 


366  BUSINESS  OF  LIFE  INSURANCE 

likewise  is  not,  strictly  speaking,  a  disburse- 
ment. Yet  accountants  have  found  the  name 
*  income"  to  define  what  they  really  mean  to  set 
forth,  but  have  so  far  not  replaced  "disburse- 
ments" by  a  better  name,  which  would  signify 
that  the  money  has  actually  been  expended.  Of 
course,  the  word  "expenditures"  would  have 
this  meaning ;  but,  unfortunately,  it  is  too  nearly 
like  "expenses,"  and  might  be  confused  with 
the  latter  by  a  careless  reader.  It  is  sufficient, 
without  further  discussion,  to  point  out  the  fact 
that  the  movement  of  investments  is  not  touched 
by  this  statement. 

While,  of  course,  it  is  proper  and  very  desira- 
ble that  items  of  receipts  and  disbursements 
which  merely  signify  that  there  has  been  a 
change  in  the  form  of  assets  should  be  omitted 
from  the  statement,  it  is  very  desirable  that 
there  should  be  added  to  the  statement  blank 
inquiries  which  will  call  out  accurate  informa- 
tion as  to  the  details  of  securities  and  as  to 
loans  upon  collateral,  together  with  information 
concerning  any  changes  that  have  been  made 
during  the  year  in  securities  owned  and  in  the 
securities  held  as  collateral.  A  recent  investiga- 
tion of  a  large  life  insurance  company  has  indi- 
cated that  it  would  be  wise  to  require  a  state- 
ment of  the  cash  on  hand  and  deposits  in  vari- 
ous banks  and  trust  companies  to  be  rendered 
each  and  every  month,  ^.nce  it  has  transpired 


THE   ANNUAL   STATEMENT      367 

that  amounts  held  by  favoured  trust  companies 
were  reduced  materially  just  before  the  annual 
statement  and  promptly  increased  immediately 
afterward.  In  the  same  way  a  much  more  seri- 
ous deception  has  been  practised  in  more  than 
one  instance,  which  came  to  the  attention  of  the 
public,  in  the  form  of  substitution  of  securities, 
just  after  making  the  statement.  Thus  in  the 
case  of  a  life  insurance  company  which  failed  a 
few  years  ago  it  was  discovered  that  it  had 
been  customary  to  withdraw  the  good  securities 
wliich  were  reported  to  be  on  hand  on  December 
31st  soon  thereafter  and  to  substitute  securities 
which  had  been  disposed  of  only  a  short  time  be- 
fore December  31st;  and  recently,  as  the  result 
of  an  examination  of  a  company  during  the 
autumn  months  a  similar  condition  was  shown, 
the  company  being  possessed  of  securities  of  a 
poor  quality  when  the  examination  was  made, 
for  which  unexceptionable  bonds  and  stocks  had 
been  substituted  by  the  time  the  annual  state- 
ment was  called  for. 

As  a  means  of  preventing  extravagance,  or 
at  least  of  rendering  policyholders  fully  ac- 
quainted with  its  proportions,  it  has  often  been 
suggested  that  the  individual  salaries  paid  to 
the  principal  officers  ought  to  be  set  forth  in  the 
statement. 

The  item  of  ''net  amount  of  uncollected  and 
deferred  premiums,"  also  showing  the  manner 


368  BUSINESS  OF  LIFE  INSURANCE 

in  which  the  same  was  arrived  at,  is  not  always 
clearly  comprehended.  The  reason  why  it  ap- 
pears in  the  statement  is  that  on  the  other  side 
of  the  account  reserves  are  charged  against  all 
policies,  whether  paid  for  by  annual  premiums 
or  by  quarterly  or  semi-annual  premiums — ex- 
cepting only  industrial  policies  which  are  paid 
by  weekly  premiums — precisely  the  same  as  if 
all  had  been  paid  by  annual  premiums.  On  this 
account  it  is  necessary  to  take  credit  for  the  por- 
tions of  the  annual  premiums  which  have  not 
been  paid,  and  in  doing  this  the  loading  is  de- 
ducted. 

It  will  be  observed  that  the  items  embraced  by 
*' suspense  account"  and  ''agents'  debit  bal- 
ances ' '  are  not  admitted  and  are  deducted  from 
the  assets. 

In  the  matter  of  market  value  of  bonds  and 
stocks  over  book  value  there  has  at  times  been  a 
good  deal  of  discussion  as  to  whether  this  should 
appear  in  statements  at  all  or  not.  Some  have 
taken  the  position  that  stocks  and  bonds  ought 
to  appear  in  the  statement  at  their  cost  value 
except  when,  after  a  considerable  length  of  time, 
the  market  had  shown  that  the  cost  value  could 
not  be  realised,  in  which  case  they  should  be 
given  the  market  value ;  but,  on  the  other  hand, 
they  should  in  no  case  be  marked  higher  than 
the  cost  value.  The  argument  in  favour  of  this 
is  that  companies  buy  these  securities  for  the 


THE   ANNUAL   STATEMENT      369 

purpose  of  investment  and  not  of  speculation, 
and  that  the  state  of  the  market  at  a  particular 
time  offers  no  indication  as  to  the  value  which 
will  be  realised  by  the  company.  This  view  is  so 
far  adopted  by  the  State  of  New  York  that  the 
law  provides  that  the  values  may  be  fixed  ac- 
cording to  the  range  of  the  market  for  a  reason- 
able time  and  need  not  be  determined  by  the 
quotations  on  the  closing  of  the  market  on  De- 
cember 31st  of  each  year. 

The  chief  item  in  the  liabilities  of  a  life  insur- 
ance company  is  the  reserve  upon  its  policies. 
This  reserve  is  usually  computed  by  the  Actu- 
aries '  Table  and  4  per  cent,  on  all  policies  issued 
prior  to  January  1st,  1901,  and  by  the  American 
Experience  Table  and  34  per  cent,  on  all  policies 
issued  after  that  date,  unless  the  company  elects 
to  have  its  policies  valued  by  a  higher  standard. 

These  tables  are  not  suitable  for  the  valuation 
of  annuities ;  yet,  until  very  recently,  they  were 
uniformly  valued  by  them  in  all  departments. 
Now  a  table  of  mortality  adapted  from  experi- 
ence derived  from  annuitants,  known  as  McClin- 
tock's  Table,  has  been  adopted  for  use  in  the 
New  York  department. 

The  total  amount  of  outstanding  claims  in  any 
well-conducted  company  is  certain  to  be  very 
small,  for  the  reason  that  life  insurance  com- 
panies are  usually  very  prompt  in  the  payment 
of  their  claims. 


370  BUSINESS  OF  LIFE  INSURANCE 

The  item  called  in  this  statement  * '  reserve  for 
contingent  guarantee  fund,"  is  known  in  the 
statements  of  most  companies  as  '' surplus."  It 
consists  of  the  surplus  reserved  for  future  divi- 
dends upon  policies  which  have  not  reached  the 
close  of  their  dividend  periods. 

The  item  of  ''premiums  paid  in  advance"  con- 
stitutes a  liability,  of  course,  until  the  time  ar- 
rives when  the  premiums  would  have  been  pay- 
able in  due  course.  There  are  two  manners  of 
prepaying  premiums,  viz.,  one  by  merely  dis- 
counting the  same  at  ordinary  interest  and  de- 
positing them  on  condition  that,  if  death  occurs 
before  the  premium  would  have  been  due,  the 
amount  paid,  with  interest  at  the  same  rate,  shall 
be  returned;  the  other,  by  having  the  premiums 
discounted  both  by  lanse  and  mortality  ratios 
and  waiving  the  condition  that  the  premium  is 
to  be  returned  in  event  of  death  before  the  date 
when  it  would  have  been  due. 

"The  exhibit  of  policies"  is  practically  self- 
explanatory.  It  is  customary  for  the  depart- 
ments to  require  this  to  be  reported,  first,  for  the 
business  done  by  the  company  everywhere,  and, 
second,  for  the  business  transacted  within  the 
State;  and  a  separate  statement  of  the  losses 
and  claims  paid  and  incurred  and  the  premiums 
within  the  State  collected  is  also  required.  If  a 
person  intending  to  purchase  life  insurance  will 
make  a  careful  study  of  the  statements  of  the 


THE   ANNUAL   STATEMENT       371 

various  companies  which  are  brought  to  his  no- 
tice he  will  find  that  there  is  much  in  them  that 
is  interesting  and  that  may  be  valuable  in  guid- 
ing him  in  his  selection  of  a  company.  First  and 
foremost,  of  course,  is  the  character  of  the  as- 
sets of  the  company.  This  may  be  judged  not 
merely  by  the  lists  of  securities,  but  also  by  the 
returns  upon  the  same  and  the  investment  losses 
or  gains  during  the  year.  By  obtaining  the 
previous  statement  and  comparing  the  market 
values  also  he  can  ascertain  what  fluctuations 
have  been  taking  place. 

By  means  of  the  statement  of  business  trans- 
acted he  can  learn  whether  the  company  is  go- 
ing forward  or  going  back  in  the  volume  of  new 
business  and  whether  its  rate  of  lapse  is  exces- 
sive or  normal.  It  is  also  possible  for  him  to 
calculate  the  rate  of  interest  realised  upon  th3 
mean  assets  or  the  invested  assets,  as  he  may 
prefer,  and  also  to  compute  the  ratios  of  ex- 
penses to  premiums,  which  may  in  some  cases 
have  a  good  deal  of  significance ;  but  he  will  do 
well  if  he  does  not  permit  himself  to  be  led  into 
considering  elaborate  series  of  ratios,  alleged  to 
have  certain  significance,  which  sounds  plausi- 
ble, but  is,  in  point  of  fact,  misleading. 


CHAPTER  XXXIII 

THE  GAIN  AND  LOSS  EXHIBIT 

In  the  summer  of  the  year  1897  the  late  W.  D. 
"Whiting,  an  eminent  actuary  and  by  far  the 
most  influential  with  the  insurance  commission- 
ers of  the  country  and  most  frequently  employed 
by  them,  brought  up  in  the  National  Convention 
of  Insurance  Commissioners  a  proposal  to  add 
to  the  annual  statement  form  for  life  insurance 
companies  a  gain  and  loss  exhibit.  Practically 
no  opposition  to  the  proposal  was  manifested, 
and  it  was  adopted  by  a  unanimous  vote  and  was 
added  to  the  requirements  for  the  statement  of 
the  transactions  of  the  companies  for  that  year. 

There  was  nothing  further  heard  of  the  mat- 
ter in  any  public  way  until  after  the  blank  forms 
for  the  statements  were  sent  out  in  the  last  days 
of  1897  and  the  first  days  of  1898.  Then  most  of 
the  life  insurance  companies  urged  the  depart- 
ments not  to  insist  upon  their  making  out  of  the 
exhibit.  All  the  State  departments,  excepting 
only  Connecticut,  Wisconsin,  Illinois  and  Ten- 
nessee, weakly  consented,  notwithstanding  that 

372 


THE  GAIN  AND  LOSS  EXHIBIT    373 

they  had  voted  in  favour  of  the  exhibit;  but, 
owing  to  the  fact  that  nearly  all  the  companies 
do  business  in  one  or  more  of  these  States,  the 
publication  of  the  exhibits  by  them  made  the 
facts  known  as  widely  as  if  all  the  State  depart- 
ments had  required  it. 

The  departments  of  New  York,  Pennsylvania 
and  Massachusetts  were  conspicuous  in  their 
disapproval  of  what  they  had  previously  ap- 
proved. The  attitude  of  the  Massachusetts  com- 
missioner in  this  matter  is  and  has  always  been 
puzzling.  In  common  with  practically  every  in- 
cumbent of  the  office,  the  present  commissioner, 
in  spite  of  more  than  one  peculiar  position,  cred- 
ited to  want  of  clear  information  on  his  own 
part  and  to  following  bad  advice  from  others, 
has  enjoyed  an  excellent  reputation  for  honesty, 
probity  and  virtuous  intentions.  Yet,  alone 
among  the  commissioners,  he  at  once  made  an 
open  fight  against  the  gain  and  loss  exhibit, 
which  for  the  first  time  gave  to  the  insured  an 
insight  into  the  actual  conduct  of  the  business 
by  the  companies  to  which  they  intrusted  their 
funds  on  a  mutual  or  participating  basis,  and 
for  several  years  he  refused  to  enter  the  con- 
vention because  of  the  presence  of  this  obnox- 
ious exhibit  in  the  uniform  blank,  approved  by 
the  commissioners. 

Notwithstanding  a  strong  fight  made  by  the 
representatives  of  some  of  the  companies,  two 


374  BUSINESS  OF  LIFE  INSURANCE 

succeeding  conventions  endorsed  the  exhibit. 
The  publication  of  the  first  statements  showed 
clearly  enough  why  there  was  strong  opposition 
on  the  part  of  some  of  the  companies  and  no 
very  warm  support  from  any  of  them.  Some 
showed  very  small  gains,  the  margins  being  al- 
most wholly  offset  by  excessive  expenses.  Some 
were  weak  in  certain  respects,  strong  in  others. 
One  of  the  bitterest  opponents  made  a  good 
showing  in  earnings  from  each  source,  but  its 
profits  from  illiberal  surrender  values  were  so 
large  that  they  constituted  a  serious  reflection 
upon  it.  More  than  any  other  one  influence,  per- 
haps, this  exhibit  led  to  the  complete  victory  of 
liberality  to  policyholders,  the  company  in  ques- 
tion being  one  of  the  earliest  to  reform. 

After  an  absence  for  several  years  from  the 
National  Convention  of  Insurance  Commission- 
ers, the  commissioner  of  Massachusetts  re- 
turned, but  only  when  W.  D.  Whiting,  the  actu- 
arial sponsor  of  the  gain  and  loss  exhibit,  was 
dead,  his  place  having  been  taken  by  a  younger 
champion,  of  far  less  experience.  In  the  con- 
vention, after  the  re-entrance  of  the  commis- 
sioner of  Massachusetts,  two  fights  were  made. 
The  first  was  led  by  him  and  was  to  exclude  con- 
sulting actuaries  from  the  convention,  such  hav- 
ing been  admitted  previously  when  accredited 
as  actuaries  of  departments.  To  this  there 
would  perhaps  be  no  objection,  though  the  ani- 


THE  GAIN  AND  LOSS  EXHIBIT    375 

mus,  viz.,  vengreance  for  the  support  of  the  gain 
and  loss  exhibit  by  consulting  actuaries,  is  obvi- 
ous. Yet,  as  has  been  stated  in  these  pages,  the 
employment  of  such  actuaries  by  departments 
to  examine  companies  which  they  also  served 
had  become  scandalous.  But  what  the  conven- 
tion did  was  to  except  from  the  rule  every  resi- 
dent actuary  connected  with  a  department  who 
also  did  consulting  work  for  companies  if  not  on 
the  basis  of  a  salary  or  time  retainer.  Thus 
they  have  left  the  very  worst  abuse  untouched 
to  this  day. 

The  other  fight  was  upon  the  gain  and  loss 
exhibit  itself,  and  was  led  bv  the  second  deputy 
of  the  New  York  department,  who  was  for  the 
first  time  sent  to  the  convention  to  represent  his 
department.  The  conditions  were  peculiar. 
With  Mr.  Whiting  dead,  and  several  of  the  com- 
missioners who  oriarinallv  supported  the  pro- 
posal, out  of  office,  the  championship  of  its  con- 
tinuance was  much  weakened,  and,  although  it 
had  mustered  a  maioritv  of  the  votes  thereto- 
fore, it  had  actually  been  emploved  by  only 
seven  departments  altogether,  the  others  dis- 
creetly dodging  the  annoyance  of  company 
protests.  Moreover,  it  was  known  that  several 
departments  would  probably  call  for  it  in  any 
event.  And  under  these  conditions  the  conven- 
tion voted  against  the  exhibit. 

The  trouble  is  that,  while  most  of  the  com- 


376  BUSINESS  OF  LIFE  INSURANCE 

panies  had  ceased  to  object  strenuously,  the  pub- 
lic, which  needed  the  information  so  seriously, 
did  nothing — as  is  usually  the  case ;  and,  in  con- 
sequence, the  public  servants,  wittingly  or  un- 
wittingly, served  the  companies — and  not  even 
the  true  interests  of  the  companies — instead  of 
the  people. 

The  commissioner  of  Tennessee  considered 
his  department  bound  by  the  action  of  the  con- 
vention of  which  he  was  a  member,  although  the 
opponents  of  the  exhibit  had  never  construed 
their  duties  in  such  a  fashion.  The  Illinois  de- 
partment also  abandoned  it.  The  commissioner 
of  Connecticut  has  called  for  the  exhibit  from 
each  company  every  year,  but  since  this  action 
of  the  convention  has  not  made  the  individual 
exhibits  public.  The  commissioners  of  Wiscon- 
sin, Minnesota  and  South  Dakota  alone  re- 
mained faithful,  and  their  reports  have  been  in 
great  demand  every  year  since  that  time.  The 
interest  in  this  part  of  the  report  has  caused  the 
commissioner  of  Minnesota  to  reprint  in  pamph- 
let form  the  gain  and  loss  exhibit,  and  it  has  had 
a  wide  circulation.  Leading  insurance  papers 
also  republish  a  wealth  of  tables  and  ratios  from 
it,  and  a  consulting  actuary,  residing  in  Massa- 
chusetts, every  year  publishes  the  same  in  more 
detailed  form  for  the  use  of  agents  and  in- 
sured. 

The  following  is  the  form  of  the  exhibit: 


THE  GAIN  AND  LOSS  EXHIBIT    377 


GAIN  AND  LOSS  EXHIBIT  DURING  YEAR 
OF  STATEMENT 

CREDITS. 

Divisible  surplus,  December  31st,  '04 $ 

Total  gross  premium  receipts $ 

Deduct  total  net  premiums $ 

Loading  earned $ 

Interest,  dividends,  and  rents $ 

Profit  and  loss  items $ 

Interest  earned $ 

.  .crease  in  market  values $ 

Expected  mortality  on  insurance $ 

Deduct  expected  mortality  on  reserve. . .  .$ 
Expected  mortality  on  net  amount  at 

risk $ 

Expected  payments  on  annuities $ 

Deduct  reserves  expected  to  be  released  by 

de^th $ 

Expected  net  payments  on  annuities $ 

Reserves    released   on    surrendered   and 

lapsed  policies $ 

(Of  the  above  $. . . .  was  from  policies 
upon  which  three  years'  premium 
had  not  been  paid.) 
Dividends    released    on    surrender    and 

lapsed  policies $ 

Credit  balance  unaccounted  for $ 

Total  credits $ 


378  BUSINESS  OF  LIFE  INSURANCE 

DEBITS. 

Expenses  incurred:    Insurance $ 

Expenses  incurred:    Investment $ 

Total  management  expenses $ 

Interest  required  to  be  earned  to  maintain 

reserve $ 

Death  losses  incurred $ 

Instalment  death  claims  incurred   (com- 
muted value) $ 

Total  debits $ 

Deduct : 
Reserves  released  by  death  of  insured. . .  .$ 

Compromises  on  losses $ 

Actual  net  mortality  on  insurance $ 

Annuity  payments  incurred $ 

Deduct  reserves  released  by  death  of  an- 
nuitants  $ 

Actual  net  payments  to  annuitants $ 

Cash  values  paid  for  surrender  and  lapsed 

policies $ 

Values  applied  to  purchase  extended  in- 
surance  $ 

Values  applied  to  purchase  paid-up  insur- 
ance   $ 

Total  surrender  values $ 

(Of  the  above  $. . . .  was  for  policies 
upon  which  three  years'  premiums 
had  not  been  paid.) 


THE  GAIN  AND  LOSS  EXHIBIT    379 

Dividends  to  policyholders. $ 

. .  crease   in    deferred    apportioned    divi- 
dends   $ 

Total  dividends   incurred  to  policy- 

liolders $ 

Dividends  to  stockholders .....$ 

Special  credits  or  reserves  to  policyhold- 

.    ers  not  herein  provided  for  (state  name) $ 

Debit  balance  unaccounted  for $ 

Divisible  surplus,  December  31st,  1905 $ 

Total  debits ' $ 

Source  of  net  gains  or  losses,  distribu- 
tions to  policyholders  and  payments  to 
stockholders : 

Divisible  surplus  December  31st,  1905.$ 

(a) — From  loading $ 

(b) — From  mortality $ 

(c) — From  annuities $ 

(d) — From  surrender  and  lapsed  policies. $ 
(e) — From  surplus  interest $ 

Total  realised $ 

.  .crease  in  market  values $ 

Surplus  earned  (or  lost)  during  the  year..$ 

Total $ 

DISTRIBUTIONS  FROM  SURPLUS. 

Dividends  paid  policyholders  in  cash $ 

Dividends  applied  by  policyholders  in  re- 
duction of  premiums $ 


380  BUSINESS  OF  LIFE  INSURANCE 

Dividends  applied  by  policyholders  to  pur- 
chase paid-up  additions $ 

Dividends  paid  stockholders $ 

.  .crease  in  unpaid  dividends $ 

.  .crease  in  deferred  dividends $ 

.  .crease  in  special  credits  or  reserves  to 

policyholders $ 

Surplus  applied  during  the  year. . .  .$ 

State  present  basis  of  computation — 
Divisible  surplus  December  31st,  1905.$ 

Mortality  table,  or  tables 

Interest  rate,  or  rates 

Insert  the  words  **gain"  or  "loss,"  "in- 
crease" or  "decrease"  in  each  case,  whichever 
may  be  required. 

This  exhibit  is  really  nothing  more  nor  less 
than  a  "profit  and  loss"  statement,  such  as 
every  business  firm  and  company  requires 
to  be  taken  off  at  least  once  a  year  for 
the  information  of  all  parties  in  interest. 
The  policyholders  in  all  mutual  companies 
and  the  holders  of  participating  policies 
in  other  companies  are  parties  in  interest. 
They  have  every  right  to  know  what  prof- 
its are  earned  and  whence  derived,  what  sal- 
vages have  been  made  and  how  the  margins 
have  been  disposed  of,  and  not  only  should  such 


THE  GAIN  AND  LOSS  EXHIBIT    381 

an  exhibit,  as  complete  and  intelligible  as 
possible,  be  required  of  every  company,  but 
every  company  should  also  be  required  to 
put  a  copy  in  the  possession  of  every  policy- 
holder. 

Of  the  value  of  the  exhibit,  Hon.  John  A. 
McCall,  president  of  a  leading  life  insurance 
company,  and  known  as  the  most  able,  efficient 
and  unswervingly  upright  insurance  super- 
intendent New  York  has  had,  made  the 
following  statement  before  the  National 
Convention  of  Insurance  Commissioners  in 
189^: 

**As  it  is  the  province  of  history  to  teach  us 
how  we  may  avoid  the  mistakes  of  our  pre- 
decessors, I  venture  to  suggest  the  following 
as  some  of  the  safeguards  suggested  by  this 
study : 

"1.  The  utmost  care  in  making  investments, 
security  to  be  always  the  paramount  considera- 
tion. 

**2.  The  necessity  of  frequent  revaluations  of 
securities,  and  of  their  rigid  adjustment  to 
changing  conditions. 

"3.  The  close  study  of  a  company's  business 
upon  the  principles  of  the  'Gain  and  Loss  Ex- 
hibit,' now  required  by  several  insurance  de- 
partments. 

**4.  The  assumption,  for  purposes  of  practi- 
cal administration,  of  a  higher  standard  of  re- 


382  BUSINESS  OF  LIFE  INSURANCE 

serve  than  that  by  which  the  company's  sol- 
vency is  tested  under  the  law.'* 

Some  of  the  objections  that  have  been  brought 
to  it — part  of  which  are  good  reasons  for  asking 
for  its  amendment,  but  none  valid  arguments  for 
doing  away  with  it — are  as  follows : 

First.  Under '  *  loading  earned, ' '  as  compared 
with  "expenses  incurred,"  the  company  which 
employs  the  preliminary  term  plan  gets  credit, 
not  for  more  loading  in  the  aggregate  through- 
out the  life  of  a  policy,  but  for  a  larger  part  at 
the  outset.  Also  companies  do" not  ''load"  alike, 
some  adding  little  and  others  much.  Therefore, 
this  is  no  test  of  economy. 

Granted.  This  is  a  profit  and  loss  statement. 
It  shows  what  the  company  has  left,  if  anything, 
from  its  own  provision  for  expenses,  and  it  has 
done  something  and  may  do  more  to  cause  com- 
panies to  cut  off  unnecessary  expense. 

Moreover,  it  can  easily  be  made  a  test  of 
economy  both  in  management  and  in  cost  of  new 
business  by  dividing  the  statement  into  two 
parts,  one  showing  the  loading  and  cost  of  new 
business  for  the  first  year  of  insurance,  and  the 
other  the  renewal  margins  and  the  expenses  of 
management.  The  commissioner  of  Wisconsin 
has  extracted  this  information,  and,  although  he 
does  not  publish  the  figures  for  individual  com- 
panies, he  gives  the  following  totals  for  the 
business  of  the  year  1903 : 


THE  GAIN  AND  LOSS  EXHIBIT    383 

POLICIES  IN  FORCE     LESS   THAN    ONE   FULL  TEAE— 
THIRTY-FOUR  COMPANIES. 

Total  expected  death  losses,  Amer- 
ican Experience  Table $  9,144,952.66 

Total  actual  death  losses  incurred 

(not  deducting  reserves) 5,157,637.50 

Total  loading-  on  first  year's  pre-- 
miums  collected 12,795,932.91 

Total  expenses  chargeable  to  first  year : 

1.  Commissions   ..$25,525,078.17 

2.  Other  expenses.   11,101,091.72 

Total  expenses  first  year $36,626,169.90 

Total  renewal  premiums  received.  .$241,986,533 

Total  expenses $71,276,612 

Less  first  year 36,626,170         $34,650,442 

By  means  of  such  tables  for  each  company,  if 
provided,  the  policyholder  or  applicant  could 
apply  a  reasonably  just  test  of  economy  in  first- 
year  expenses  and  in  expenses  of  management 
to  every  company. 

Second.  The  items,  ''interest,  dividends  and 
rents,  profit  and  loss  items,  increase  or  decrease 
in  market  values,"  on  one  side,  and  "interest 
required  to  make  good  the  reserve,'*  on  the 
other,  will  show  a  much  larger  profit  in  a  com- 
pany carrying  a  large  accumulation  of  surplus 
under  deferred  dividend  plans  than  in  one  car- 


384  BUSINESS  OF  LIFE  INSURANCE 

rying  a  smaller  surplus,  though  the  latter  may 
be  realising  a  better  rate. 

True;  but  the  larger  surplus  really  is  earned, 
is  it  not?  What  should  be  done  to  remedy  this  is 
under  the  head,  ''Distribution  from  Surplus," 
at  the  foot  of  the  exhibit,  to  require  the  full  net 
interest,  actually  to  be  credited  to  the  accumula- 
tion of  surplus,  to  be  so  dealt  with. 

The  inclusion  of  changes  in  market  values  is 
also  criticised;  but  to  the  extent  that  they  are 
voluntarily  or  compulsorily  embraced  in  the 
statement  of  resources  and  liabilities,  they  cer- 
tainly should  be  included  here.  A  profit  and 
loss  statement  must  accord  with  the  rest  of  the 
report,  i.  e.,  must  start  with  the  surplus  at  the 
beginning  of  the  year,  as  shown  by  the  financial 
statement,  and  close  with  the  surplus  at  the  end 
of  the  year. 

Third.  The  item  of  **  expected  mortality  on* 
net  amount  at  risk,'*  it  is  said  by  some  objec- 
tors, is  not  susceptible  of  exact  calculation  and 
must  be  estimated,  thus  vitiating  the  entire  ex- 
hibit. 

The  objection  has  anly  the  basis  that,  when  a 
company  attempts  to  arrive  at  this  directly,  it  is 
a  tedious  process,  usually  liable  also  to  errors. 
But  it  does  not  need  to  be  undertaken  directly. 
The  total  gain  or  loss  is  shown  by  reference  to 
the  financial  statement.  Every  other  item  that 
makes  up  that  total  may  be  ascertained  with 


THE  GAIN  AND  LOSS  EXHIBIT    385 

ease ;  the  remaining  profit  or  loss  is  from  mor- 
tality under  or  over  the  expected.  The  amount 
of  the  ''actual  net  mortality  on  insurance"  is 
readily  determined;  this,  together  with  the 
profit  or  loss  on  mortality,  gives  the  ''expected 
mortality  on  net  amount  at  risk,"  without  both- 
ering with  the  "expected  mortality  on  insur- 
ances" and  "expected  mortality  on  reserves." 
The  process  of  elimination  here  described  is  the 
simple  and  reasonable  way  to  obtain  the  desired 
information. 

Fourth.  Mortality  is  expected  to  be  higher  in 
industrial  companies. 

True ;  but  if  the  industrial  companies,  volun- 
tarily or  compulsorily,  get  up  their  statements 
on  the  basis  of  the  standard  tables,  instead  of 
by  tables  deduced  from  industrial  experience, 
the  apparent  profit  and  loss  should  follow  the 
statements.  To  do  so  merely  transfers  the  ap- 
parent profit  to  the  difference  between  loading 
and  expenses. 

Fifth.  The  items,  "expected  net  payments 
on  annuities"  and  "actual  net  payments  to  an- 
nuitants, '  *  are  likely  to  show  a  loss  when  a  gain 
has  really  been  secured,  if  the  standard  tables  of 
mortality  among  insured  lives  are  used. 

But,  in  the  first  place,  if  and  when  annuities 
were  valued,  as  they  ought  to  be,  by  tables  de- 
duced from  experience  with  annuitants,  the  ob- 
jection would  fall  to  the  ground,  and,  again,  if 


386  BUSINESS  OF  LIFE  INSURANCE 

the  financial  statement  is  to  show  a  fictitious 
surplus  by  undervaluing  annuities,  there  is  no 
impropriety  about  making  the  profit  and  loss 
statement  correspond.  The  gains  are  by  this 
method  thrown  into  the  margins  on  loadings  of 
premiums. 

The  foregoing  are  the  chief  objections  that 
have  been  urged,  usually  speciously  and  because 
companies  did  not  enjoy  the  disclosures  which 
the  exhibit  makes  of  defects  of  management. 
The  objections  could  be  obviated  very  easily  so 
far  as  they  call  for  remedies  or  improvements, 
and  ought  to  be,  as  follows : 

By  stating  the  loading  upon  premiums  for  the 
first  year  of  insurance  separately  and  also  ex- 
penses for  that  year. 

By  stating  expected  and  actual  net  mortuary 
losses  for  the  first  year  separately. 

By  requiring  industrial  insurance  mortality, 
both  expected  and  actual,  to  be  stated  separate- 
ly, using  a  proper  table  to  measure  it. 

By  requiring  margins  on  non-participating 
business  to  be  computed  and  reported  sepa- 
rately. 

By  requiring  the  interest  for  the  accumula- 
tion of  deferred  dividends  to  be  set  aside  defi- 
nitely for  that  purpose. 

By  requiring  the  expected  net  payments  on 
annuities  to  be  computed  according  to  a  life 
table  from  the  experience  with  annuitants. 


THE  GAIN  AND  LOSS  EXHIBIT    387 

Even  in  the  absence  of  these  amendments, 
however,  the  gain  and  loss  exhibit  is,  next  after 
the  financial  statement,  much  the  most  valuable 
guide  a  person  intending  to  purchase  life  insur- 
ance can  have,  both  in  regard  to  the  company's 
prospects  for  success  and  also  in  regard  to  the 
earnings  currently  realised  for  holders  of  par- 
ticipating policies. 

Its  utility  as  an  indication  of  a  company's 
prospects  has  been  shown  very  clearly  in  sev- 
eral instances.  Thus  the  failure  of  a  certain 
small  New  York  company  was  plainly  forecast 
by  it,  for  several  years,  and  the  recent  troubles 
of  two  others  of  the  smaller  companies  were 
quite  as  plainly  foretold  several  years  in  ad- 
vance. 

Lawmakers  could  perform  no  better  service 
for  the  public  than  to  enact  laws  requiring  this 
exhibit  to  be  made  each  year  by  every  company 
in  as  simple  and  self-explanatory  form  as  possi- 
ble, and  a  copy  to  be  sent,  with  a  copy  of  the 
company's  financial  statement,  to  each  policy- 
holder. The  exhibit  can  be  made,  as  has  already 
been  proved,  a  most  powerful  engine  to  secure 
reform  of  methods  which  now  prevent  life  insur- 
ance from  being  as  beneficial  and  economical  as 
it  should  be  and  cause  it  only  too  often  to  be 
purchased  under  a  misapprehension  as  to  the 
earnings  and  the  prospects  for  dividends. 


CHAPTER  XXXIV 

HINTS  AND  HELPS  IN  PUECHASING  LIFE  INSUBANCE 

In  purchasing  life  insurance  the  intending  ap- 
plicant has  the  following  matters  to  consider : 

1.  His  own  requirements  and  responsibilities. 

2.  His  ability  to  pay  premiums. 

3.  The  soundness  of  the  company's  plans. 

4.  The  solvency  and  strength  of  the  company. 

5.  The  earning  power  of  the  company. 

6.  The  dividends  actually  paid  to  individual 
policyholders. 

7.  The  terms  and  conditions  of  its  policies. 
Upon  each  of  these  something  may  be  said  for 

his  guidance. 

Every  man  is,  from  the  very  fact  that  he  is  a 
man,  subject  to  the  risks  of  personal  disability 
and  of  premature  death,  as  well  as  certainly  des- 
tined to  die  some  day.  Therefore,  the  occasion 
for  life  insurance  always  exists.  But  the  need 
for  it  is  sometimes  not  so  obvious,  and  the 
amount  required,  as  well  as  the  form  of  policy 
most  suitable,  depends  upon  conditions  peculiar 
to  the  individual. 

388 


HINTS   AND   HELPS  389 

Any  man,  perhaps,  would  be  unwise,  in  view 
of  possible  future  engagements,  to  assume  that 
he  will  never  have  reason  to  protect  any  person 
against  loss  by  his  death,  merely  because  no  per- 
son at  this  time  has  such  claims  upon  him.  Yet 
it  must  be  acknowledged  there  are  now  and  then 
individuals  who  know  to  a  moral  certainty  that 
there  will  be  no  need  for  insurance  upon  their 
lives. 

As  to  the  average  man,  it  might  safely  be  pre- 
mised already  in  his  infancy  that  he  will  re- 
quire, in  order  to  cover  the  financial  loss  to 
others  that  will  be  caused  by  his  death,  if  he 
lives  to,  say,  age  25,  a  certain  minimum  amount 
of  life  insurance — suiRcient  to  support,  in  a  very 
economical  fashion,  a  widow  and  one  or  more 
children.  And,  on  several  grounds,  it  would  be 
well  if,  in  the  same  manner  that  parents  make 
other  provisions  for  the  future  responsibilities 
of  their  children,  they  were  to  provide  for  the 
going  into  force,  promptly  upon  the  young 
man's  attaining  his  majority,  for  instance,  of  a 
moderate  amount  of  life  insurance  at  a  mini- 
mum cost.  This  can  be  done  at  a  very  small  an- 
nual investment  by  the  parents  during  the  boy's 
minority,  securing  for  him  the  attaching  of  the 
insurance  at  age  21,  without  regard  to  the  then 
state  of  the  health  of  the  insured  and  at  the 
same  low  rate.  Thus  by  the  payment  from  birth 
of  $8.55  per  annum,  returnable  if  the  boy  dies 


390  BUSINESS  OF  LIFE  INSURANCE 

before  21,  an  insurance  of  $1,000  of  the  sort  de- 
scribed might  be  furnished,  paying  the  company 
the  same  margin  of  loading  as  one  beginning  at 
21,  which  would  cost  $19.62  per  annum,  and 
which  would  have  much  less  value.  Since,  also,  by 
reason  of  personal  condition  or  of  changed  fam- 
ily history,  many  of  the  boys  who  reach  21  will 
be  uninsurable  and  so  unable  to  cover  their  re- 
sponsibilities, by  life  insurance,  if  not  provided 
for  in  this  way,  it  is  evident  that  this  small  in- 
vestment would  be  a  wise  one. 

But,  in  any  event,  there  can  be  little  doubt 
that  every  young  man  at  the  outset  of  his  adult 
life,  whether  already  burdened  with  the  respon- 
sibilities of  a  family  or  not,  has  such  probabili- 
ties that  there  will,  ere  long,  be  interests  depend- 
ing upon  his  survival  which  it  will  be  his  duty 
to  guard  and  that  he  may,  when  that  time  comes, 
not  be  safely  insurable,  that  he  is  not  warranted 
in  deferring  tal^inrr  '^■n  that  reasonable  amount 
of  life  insurance  which  will  r>rovide  bare  necessi- 
ties for  those  who  may  be  dependent  upon  him. 

How  much  ought  this  to  be  ?  The  answer  must 
necessarily  differ  with  the  conditions ;  but  it  is, 
perhaps,  safe  to  say  that  for  the  average  clerk, 
employee,  small  tradesman,  skilled  workman  and 
the  like  in  the  larger  cities,  it  should  be  suffi- 
cient to  produce  an  income  for  twenty  years  of 
not  less  than  $500  per  annum.  This,  discounted 
at  interest  at  4  per  cent.,  would  call  for  an  insur- 


HINTS   AND   HELPS  391 

ance  of  nearly  $7,000.  If  the  policy  is  taken  out 
promptly  upon  attaining  majority,  it  would  cost, 
at  the  lowest  whole  life  non-participating  rates, 
$105.07,  or  about  one-tenth  of  the  average  in- 
come, perhaps,  of  the  members  of  this  class  and 
much  more  than  that  percentage  of  the  income 
at  the  outset.  Delay  will  result  in  a  higher  cost 
also.  The  purchase  of  participating  policies, 
also,  would  increase  the  cost  about  40  per  cent, 
at  the  outset,  but  if  the  company  has  been  care- 
fully selected  and  if  the  dividends  are  drawn 
annually  in  cash,  the  net  cost  may  be  as  low  or 
lower.  It  is  worthy  of  note  that,  on  the  same 
basis  as  the  non-participating  rates  are  com- 
puted, a  similar  policy,  secured  by  the  parents 
paying  from  the  birth  of  the  child,  would  cost 
from  the  boy's  majority  only  $6.54  per  $1,000, 
or  $45.78  per  annum  in  all. 

In  the  smaller  cities,  towns  and  villages  about 
two-thirds  of  this  provision,  or,  in  round  num- 
bers, $4,500  to  $5,000  of  life  insurance,  will  an- 
swer, and  day  labourers  in  town  and  country, 
according  to  the  usual  scale,  require  a  minimum 
provision  of,  say,  40  per  cent,  of  the  sum  first 
mentioned,  or  a  life  insurance  of  from  $2,500  to 
$3,000.  In  each  case,  if  the  insurance  be  taken 
at  once  upon  attaining  one's  majority,  the  cost 
should  not  exceed  10  per  cent,  of  the  average 
earnings.  Some  increase  in  this  ratio  of  cost  to 
income  is  justifiable,  surely,  in  order  to  secure  a 


392  BUSINESS  OF  LIFE  INSURANCE 

corresponding  protection  against  disability  by 
accident  or  disease  and  a  provision  for  old 
age;  the  necessary  increase,  if  the  insurance 
is  taken  at  the  age  of  21,  would  be  to  about 
12  1-2  per  cent,  to  14  per  cent,  of  the  income.  A 
diminution  of  the  total  life  insurance  by  from 
one-third  to  two-thirds  below  this  proper  mini- 
mum in  order  to  increase  the  element  of  in- 
vestment so  as  to  defer  the  dividends  for  twenty 
years,  to  pay  for  the  policy  in  twenty  years 
or  to  mature  as  an  endowment  in  twenty  years 
or  less,  or  anything  of  the  sort,  is  an  abuse 
of  life  insurance,  the  purchaser  being  seduced 
by  the  hope  of  personal  gain  into  failing  to  per- 
form his  full  duty.  The  only  conceivable  defence 
for  this  is  that  many  a  man  has  been  lured  into 
performing  some  part  of  his  duty  by  the  absurd 
expectation  that,  after  furnishing  insurance  for 
twenty  years,  the  policy  would  yield  impossible 
profits. 

Efforts  have  been  made  from  time  to  time  to 
determine  scientifically  the  value  of  a  man's  life 
in  order  to  fix  the  amount  of  insurance  that  he 
should  carry.  The  usual  course  has  been  to  com- 
pute the  present  value  of  his  surplus  earnings — 
some  would  use  the  entire  earnings — for  the 
term  of  his  expectancy,  as  if  he  were  certain  to 
live  that  long  and  no  longer,  or  else  the  present 
value  of  an  annuity  upon  his  life  for  this 
amount.   Neither  of  these  methods  accords  with 


HINTS  AND   HELPS  393 

tKe  facts,  whicli  call  for  tHe  elimination  of  the 
period  of  old  age  and  also  for  deduction  for 
probable  loss  of  time  by  disability,  provision 
against  which  cannot  be  made  by  life  insurance, 
but  must  be  made,  if  at  all,  by  health  and  acci- 
dent insurance.  The  argument  is  that  if  a  man 
owns  a  building,  producing  a  certain  rental  in- 
come, he  insures  against  the  loss  of  that  income 
by  fire,  and  so  he  should  against  this  loss  of  in- 
come. But  a  man  does  not  take  fire  insurance  to 
provide  an  income,  but  merely  to  cover  the  value 
of  the  building  alone,  i.  e.,  to  enable  him  to  build 
again,  and  in  taking  life  insurance  a  similar  rule 
calls  for  considering  what  is  intended  to  be  ac- 
complished, and  the  wise  man  makes  the  pro- 
vision which  is  actually  required,  or  is  likely  to 
be,  for  the  maintenance  of  those  to  whom  he 
owes  that  duty. 

To  pay  up  the  insurance  in  a  short  term  or  to 
cause  it  to  mature  at  a  given  age,  if  the  insured 
survive,  are  in  themselves  desirable;  but  they 
are  justifiable,  as  has  been  said,  only  in  case  a 
suflficient  provision  against  the  financial  loss  be- 
cause of  the  insured's  death  has  actually  been 
made.  When  the  policyholder  has  secured,  there- 
fore, the  protection  for  those  dependent  upon 
him  which  he  knows  will  be  requisite  in  order  to 
enable  them  in  event  of  his  death  to  be  main- 
tained as  he  would  have  them  maintained,  he  can 
with  propriety  increase  the  amount  of  his  in- 


394  BUSINESS  OF  LIFE  INSUEANCE 

vestment  in  order  to  mature  the  policies  as  en- 
dowments, for  instance,  or  to  pay  them  up  in  a 
short  period ;  but,  even  in  that  case,  in  view  of 
the  possible  turns  which  fortune  may  take,  he 
ought  to  insist  that  these  policies  be  convertible 
into  whole  life  insurance, upon  favourable  terms, 
at  the  end  of  any  year,  so  that  he  may  be  as 
nearly  certain  as  possible  that  he  can  keep  the 
insurance  in  force. 

Proper  attention  to  the  question  of  the  sound- 
ness of  the  plans  of  insurance  offered  by  a  com- 
pany is  requisite  also.  In  every  community 
there  can  be  found  aged  men  and  men  otherwise 
infirm  and  uninsurable  who  relied  upon  an  un- 
sound plan  of  insurance  which  could  not  and 
did  not  '^ finance  out,"  as  the  expression  goes, 
but  instead  either  left  them  without  protection 
or  called  for  an  outlay  so  much  higher  than  was 
anticipated  and  than  would  have  been  necessary, 
if  paid  from  the  outset,  that  they  could  not  con- 
tinue. Even  as  "temporary  protection,"  for 
which  many  men  wKo  carry  insurance  of  this  na- 
ture have  taken  it,  it  is  not  desirable  unless  the 
applicant  has  a  sufficient  amount  of  insurance 
upon  sound  plans  already,  and  not  then  unless 
he  is  prepared  to  meet  the  inevitable  increase  in 
rates  without  complaint,  or,  as  is  his  privilege, 
to  drop  out  without  resentment. 

Legal  reserve  companies  may  usually  be  re- 
lied upon  to  be  offering  sound  plans,  but  now 


HINTS   AND   HELPS  395 

and  tHen  this  has  not  been  the  case,  owing  to  the 
remissness  of  State  officials,  as,  for  instance, 
when  "investment  bonds"  were  permitted  to  be 
sold.  Yet  all  that  a  legal  reserve  company  actu- 
ally guarantees  is  sure,  so  far  as  sound  plans 
can  make  it  sure,  because  the  reserve  held,  to- 
gether with  the  future  premiums,  will  at  least 
enable  the  performance  of  all  that  was  guaran- 
teed. But  promises  that  are  not  a  part  of  the 
guarantees  should  be  accepted  with  great  cau- 
tion. 

Some  of  the  fraternal  societies  are  now  ope- 
rating on  sound  plans  and  with  adequate  rates. 
Two  of  them  carry  the  full  legal  reserve,  and, 
while  charging  lower  rates  than  regular  life  in- 
surance companies  because  managed  less  expen- 
sively, are  on  as  sound  a  basis  as  any  regular 
company.  Several  others  have  adopted  adequate 
rates  and  have  made  proper  provisions  for  ac- 
cumulating reserves.  Some  others  have  approx- 
imated this  condition  and  will  doubtless  make 
other  changes  later  to  make  the  reapproachment 
complete. 

The  solvency  of  a  company  depends  upon 
something  more  than  the  soundness  of  its  plans. 
"Sound  plans"  has  reference  to  the  mathemati- 
cal sufficiency  of  its  premiums,  but  their  actual 
sufficiency  depends  upon  the  following: 

The  mortality  not  being  higher  than  as  per  the 
table  employed. 


396  BUSINESS  OF  LIFE  INSURANCE 

The  expenses  and  contingencies  not  absorbing 
more  than  the  loading. 

The  funds  being  safely  invested  and  yielding 
interest  at  least  equal  to  the  assumed  rate. 

One  or  even  two  of  these  may  not  be  true  in  a 
particular  case,  and  yet  solvency  may  be  main- 
tained because  the  loss  by  these  is  more  than 
offset  by  the  margin  of  profit  in  the  other.  There 
might  even  be  an  instance  also  of  mere  solvency 
being  assured  by  gains  from  forfeitures,  though 
all  three  of  these  were  to  show  a  loss.  But  sol- 
vency on  such  terms  is  precarious. 

The  character  of  the  assets  is  also  a  most 
important  determinant  of  the  solvency  and 
strength  of  a  company;  but  the  policyholder 
must  not  be  misled  by  the  appearances  into  sup- 
posing that  an  extremely  long  list  of  quoted  se- 
curities is  conclusive  evidence  of  a  company's 
superiority.  The  contrary  is  the  case,  in  some 
instances,  at  least.  Life  insurance  companies 
have  little  occasion  to  realise  quickly,  and  the 
possession  of  too  long  a  list  of  quoted  bonds  and 
stocks  might  mean  that  the  management  is  spec- 
ulating upon  variations  in  quotations. 

The  existence  of  a  considerable  surplus  is 
deemed  an  evidence  of  strength,  as  indeed  it  is. 
But  the  best  evidence  of  strength  and  security, 
beyond  mere  solvency,  is  continued  and  unabat- 
ing  margins  of  surplus  from  year  to  year,  es- 
pecially if  liberally  contributed  by  each  of  the 


HINTS   AND   HELPS  397 

sources  mentioned.  Better  proof  of  fundamental 
vigour  can  hardly  be  expected  and  is  rarely  to 
be  had. 

A  study  of  the  gain  and  loss  exhibit  is  impor- 
tant, therefore,  even  though  the  applicant  pur- 
poses purchasing  non-participating  insurance, 
for  it  goes  to  the  question  of  the  strength  of  the 
company.  But  it  is  of  yet  greater  importance  if 
the  policy  is  to  be  participating,  because  in  that 
way  only  can  the  applicant  obtain  a  good  gen- 
eral idea  of  the  relative  prospects  for  surplus- 
earning  of  the  various  companies. 

Yet  the  thing  of  the  greatest  significance — 
always  supposing  that  a  company  is  not  dividing 
each  year  more  than  was  really  earned — is  the 
actual  dividends  paid  to  individual  policyhold- 
ers. Not  the  total  dividends  paid  and  allowed, 
but  the  actual  pajonents  to  each  individual  pol- 
icyholder. If  the  applicant  is  going  to  buy  an 
annual  dividend  policy  he  should  require  the 
candidates  for  his  favour  to  show  him  the  scale 
of  annual  dividends,  actually  paid  in  the  current 
year  by  their  respective  companies  upon  policies 
one  year  old,  two  years  old,  etc.,  of  the  exact 
kind  he  is  considering  and  issued  at  his  exact 
age.  Or,  if  the  company  will  not  furnish  this 
schedule — and  why  a  company  should  refuse  to 
do  so  unless  conscious  of  its  inferiority  it  is  hard 
to  see — he  should  insist  upon  the  records  of,  say, 
four  such  policies,  names  and  addresses  being 


398  BUSINESS  OF  LIFE  INSURANCE 

given,  issued  respectively  five,  ten,  fifteen  and 
twenty  years  ago,  each  with  annual  dividends. 

As  to  deferred  dividends,  companies  that  have 
completed  such  periods  usually  furnish  actual 
results  as  illustrations;  but  it  is  necessary  for 
the  applicant  to  bear  in  mind  that  interest  was 
higher  and  expenses  lower  years  ago  and  that 
these  results  are  not  very  likely  to  be  duplicated. 
He  should  also  examine  the  statement  of  the 
company  and  its  gain  and  loss  exhibit  carefully 
to  ascertain  whether  the  company  is  actually 
earning  a  good  margin  of  surplus  and  carrying 
such  an  accumulation  as  the  sample  dividends 
would  call  for,  or  appears,  on  the  other  hand,  to 
be  paying  these  dividends  which  should  have 
been  accumulating  for  years,  wholly  or  in  large 
part  from  current  earnings. 

If  it  is  possible  for  the  applicant  to  learn 
whether  the  company  is  known  to  pay  excessive 
commissions — which  he  may  usually  do  upon 
careful  inquiry — that  is  also  a  strong  indication 
whether  good  dividends  are  to  be  expected.  The 
companies  whose  entire  expense  for  new  busi- 
ness is  far  within  the  percentages  named  in  a 
previous  chapter  on  this  subject  are  invariably 
paying  excellent  dividends,  while  several  com- 
panies which  of  old  had  unexcelled  reputations 
for  the  payment  of  dividends  have  fallen  far 
back  since  they  adopted  extravagant  scales  of 
first  year's  commissions. 


HINTS   AND   HELPS  399 

Especially  when  the  applicant  is  offered  a 
very  liberal  rebate  should  he  be  suspicious  that 
the  commissions  are  too  high  to  enable  the  com- 
pany to  pay  its  policyholders  so  good  dividends, 
as  if  it  were  to  pay  no  commissions  whatever 
and  do  little  new  business,  instead  of  better. 

The  applicant  should  inspect  with  great  care 
the  policies  submitted  to  him,  comparing  them 
with  the  requirements,  set  forth  in  a  previous 
chapter,  for  ''The  Ideal  Policy."  A  general  and 
insistent  demand  for  the  best  will  cause  all  good 
companies  to  write  them.  He  should  carefully 
take  into  account  the  possible  exigencies  of  his 
own  future  and  aim  to  take  a  policy  which  will 
not  embarrass  him  unduly,  without  regard  to 
the  changes  which  may  take  place  in  his  condi- 
tion physically,  but  will  be  a  friend,  no  matter 
what  happens. 


CHAPTER  XXXV 

REMEDIES 

Notwithstanding  that  this  book  has  had  to 
do  chiefly  with  the  merits  and  beneficence  of  the 
institution  of  life  insurance,  there  have  been 
found  flaws  and  errors  which  required  notice 
and  criticism,  and  it  would  not  be  fair  to  leave 
the  reader  without  a  suggestion  as  to  the  appro- 
priate remedies. 

First  and  foremost,  the  lessons  of  life  insur- 
ance history,  enforced  by  recent  events,  demon- 
strate that  the  formation  of  purely  mutual  com- 
panies, required  by  law  to  maintain  solvency, 
should  be  encouraged.  The  organisation  of  mu- 
tual societies  to  operate  on  unsound  plans,  on 
the  other  hand,  should  not  be  permitted. 

At  present  precisely  the  contrary  is  the  fact. 
Mutual  companies  may  be  organised  freely  to 
operate  on  unsound  assessment  plans,  but  may 
not  be  organised  at  all  under  the  legal  reserve 
laws.  Whether  this  came  about  through  the 
cupidity  of  existing  companies,  desiring  a  mo- 
nopoly, or  through  the  stupidity  of  legislators 
who,  being  influenced  by  no  present  interest, 

400 


REMEDIES  401 

calling  for  such  powers,  blindly  shut  the  door 
against  the  enterprise  of  the  future  generations, 
does  not  much  matter.  It  has  resulted  in  the 
evils  of  assessmentism  assuming  gigantic  pro- 
portions and  also  in  many  grievous  ills  in  life 
insurance  companies  operating  on  sound  plans. 

No  remedy  can  go  to  the  root  of  the  matter, 
therefore,  which  does  not  provide  for  the  organi- 
sation of  regular  mutual  companies.  That  is  the 
first  essential  thing  for  a  good  law. 

The  second  is  to  enable  the  mutual  company 
to  conduct  its  business  successfully,  while  main- 
taining complete  solvency.  Under  existing  con- 
ditions this  cannot  be  done,  except  by  emplojing 
the  subterfuge  of  making  the  first  yeaf^  pre- 
mium, in  part  or  wholly,  a  one-year  term  pre- 
mium, and  this  also  is  not  permitted  in  at  least 
one  important  State.  What  is  needed  is  that  the 
legal  reserve  requirements  follow  the  facts  and 
do  not  charge  companies  a  reserve  to  cover  a 
higher  mortality  during  the  first  five  years  of 
insurance  than  will  be  exr>prienced.  but  instead, 
by  computing  the  true  liability  as  exactly  as  pos- 
sible, set  free  the  funds  which  on  a  most  econom- 
ical basis  are  required  in  order  to  secure  the 
benefits  for  all  which  accrue  from  the  accession 
of  new  members. 

Such  a  modification  of  the  reserve  laws,  so  as 
to  admit  of  the  use  of  what  is  known  as  "select 
and  ultimate"  reserves  during  the  first  five 


402  BUSINESS  OF  LIFE  INSURANCE 

years,  should,  of  course,  be  permissive  only, 
leaving  companies  free  to  employ  a  higher  re- 
serve standard  if  they  choose,  but  it  should  be 
the  minimum  standard  because  fairly  a  test  of 
solvency  on  the  basis  of  participation  as  pro- 
vided by  the  premiums. 

If  there  be  no  such  modification — or  if  resort 
be  not  had  to  preliminary  term,  as  stated — the 
mutual  company  cannot  meet  its  expenses  for 
the  first  year  of  insurance,  out  of  the  "loading" 
in  the  usual  premium,  and  so  cannot  succeed,  un- 
less by  being  placed  under  financial  obligations 
for  money  advanced  to  purchase  business — al- 
ways a  serious  thing  and  usually  a  means  of  un- 
limited * '  graft. ' '  It  results  also  in  participating 
premiums  being  higher  than  would  otherwise  be 
necessary. 

A  bill  modifying  the  law  as  stated  was  passed 
bv  the  New  York  Assembly  in  1905  and  was  on 
third  reading  in  the  Senate  when  it  adjourned. 
It  was  not  pressed  for  passage,  because  unex- 
pected opposition  was  encountered;  but  it  had 
been  approved  by  leading  experts  and  by  sev- 
eral of  the  principal  companies. 

It  is  often  proposed  to  limit  commissions,  or 
even  the  total  expenditure  for  new  business,  by 
law,  to  a  certain  proportion  of  the  new  pre- 
miums or  to  the  loading  upon  the  first  year's 
premium. 

Were  the  latter  attempted,  the  tendency  to 


REMEDIES  403 

higher  premiums  would  be  more  pronounced 
than  now,  and  the  law  would,  besides,  be  evaded 
continually,  of  necessity,  unless  the  company  re- 
sorted to  preliminary  term,  in  which  case  the 
statute  would  be  valueless  as  a  restraint  upon 
wastefulness,  if  the  whole  premium  on  limited- 
payment  life  and  endowment  plans  were  treated 
as  being  paid  for  by  one-year  term  insurance. 

If  the  reserve  laws  were  rectified,  so  that 
small  and  new  mutual  companies,  operating  on 
sound  plans  and  maintaining  complete  solvency, 
could  be  established  wherever  desired,  the  re- 
quired reserve  being  what  is  reasonably  needed 
for  solvency,  these  companies,  with  their  econ- 
omy and  their  lower  premiums,  would  perhaps 
set  such  a  standard  of  economical  efficiency  that 
compulsory  regulations  would  be  unnecessary. 
Indeed,  more  than  one  of  the  larger  companies 
would  make  use  of  this  natural  limitation  of 
profitable  expenditure  prompt! v. 

In  the  reports  of  companies  the  following 
things  are  greatly  to  be  desired,  viz. : 

Complete  returns  of  investment  and  loan 
transactions  throughout  the  year. 

The  gain  and  loss  exhibit,  made  mandatory 
and  not  at  the  option  of  the  commissioner,  and 
perfected,  especially  so  as  to  distinguish  be- 
tween participating  and  non-participating,  ordi- 
nary and  industrial,  expenses  and  losses  for  the 
first  year  and  for  other  years. 


404  BUSINESS  OF  LIFE  INSURANCE 

Scales  of  dividends,  actually  paid  or  allowed 
the  year  previous,  on  the  different  classes  of  pol- 
icies issued,  for  several  sample  ages  and  for  all 
durations,  and  statements  showing  the  accumu- 
lations per  $1,000  under  different  forms  of  de- 
ferred dividend  policies. 

In  the  management  of  mutual  companies  the 
prohibition  of  proxy  voting,  and  the  introduc- 
tion of  direct  voting  by  mail,  or  in  local  meet- 
ings by  secret  ballot. 

A  provision  permitting  the  retirement  of  capi- 
tal stock  in  all  companies  operating  on  the  mu- 
tual or  participating  plan  by  the  payment  of  just 
compensation. 

Other  things  of  minor  moment  could  be  sug- 
gested, but  the  foregoing  amendments  to  exist- 
ing laws  and  practices  would  render  most  of  the 
things  nowadays  complained  of  impossible  or 
highly  improbable,  and  would  also  enable  the 
policyholders  to  judge  discerningly  of  compa- 
nies and  policies.  In  other  words,  the  best  thing 
to  secure  both  soundness  and  the  largest  returns 
to  policyholders  is  what  was  most  warmly  rec- 
ommended by  Emory  McClintock,  actuary  of  the 
Mutual  Life  Insurance  Company  of  New  York, 
at  the  National  Convention  of  Insurance  Com- 
missioners in  1898: 

Freedom  and  Publicity. 

THE  END 


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